<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X} Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the quarterly period ended September 30, 1998.
OR
[ ] Transitional Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the transition period from:_____to:____.
Commission file number 0-26660
ESS TECHNOLOGY, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CALIFORNIA 94-2928582
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
48401 FREMONT BOULEVARD
FREMONT, CALIFORNIA 94538
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE )
(510) 492-1088
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
As of October 31, 1998, the registrant had 41,162,762 shares of common stock
outstanding.
<PAGE> 2
ESS TECHNOLOGY, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Part I. FINANCIAL INFORMATION Page
----
<S> <C>
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets - September 30, 1998 3
and December 31, 1997, unaudited
Condensed Consolidated Statements of Operations - three and 4
nine months ended September 30, 1998 and 1997, unaudited
Condensed Consolidated Statements of Cash Flows - nine 5
months ended September 30, 1998 and 1997, unaudited
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and 9
Results of Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ESS TECHNOLOGY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
Sept. 30, Dec. 31,
1998 1997
-------- --------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 23,903 $ 27,760
Short-term investments 7,530 14,524
Accounts receivable, net 33,525 36,265
Inventories 31,936 47,285
Deferred income taxes 4,899 4,898
Prepaid expenses and other assets 6,321 4,053
--------- ---------
Total current assets 108,114 134,785
Property and equipment, net 37,560 32,922
Other assets 46,659 63,947
--------- ---------
$ 192,333 $ 231,654
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 44,620 $ 50,858
Income taxes payable (943) 183
Deferred income taxes 9,506 9,506
--------- ---------
Total current liabilities $ 53,183 60,547
--------- ---------
Commitments and contingencies (See Notes 7 and 8)
Shareholders' equity:
Preferred stock, no par value, 10,000 shares
authorized; none issued and outstanding -- --
Common stock, no par value, 100,000 shares
authorized; 41,147 and 40,674 shares
issued and outstanding 138,279 137,452
Retained earnings 871 33,655
--------- ---------
Total shareholders' equity 139,150 171,107
--------- ---------
Total liabilities and shareholders' equity $ 192,333 $ 231,654
========= =========
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE> 4
ESS TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
Sept. 30, 1998 Sept. 30, 1997 Sept. 30, 1998 Sept. 30, 1997
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Net revenues $ 52,309 $ 52,172 $140,020 $178,782
Cost of revenues 43,683 35,200 126,091 104,191
-------- -------- -------- --------
Gross profit 8,626 16,972 13,929 74,591
Operating expenses:
Research and development 8,134 8,343 23,159 20,971
Research and development in-process -- -- -- 22,200
Selling, general and administrative 8,815 6,303 26,476 17,476
-------- -------- -------- --------
Operating income (loss) (8,323) 2,326 (35,706) 13,944
Nonoperating income, net 466 417 1,183 1,864
-------- -------- -------- --------
Income (loss) before provision for
income taxes (7,857) 2,743 (34,523) 15,808
Provision for (benefit from) income taxes (388) 1,025 (1,739) 14,636
-------- -------- -------- --------
Net income (loss) $ (7,469) $ 1,718 $(32,784) $ 1,172
======== ======== ======== ========
Net income (loss) per share - basic $ (0.18) $ 0.04 $ (0.80) $ 0.03
======== ======== ======== ========
Net income (loss) per share - diluted $ (0.18) $ 0.04 $ (0.80) $ 0.03
======== ======== ======== ========
Shares used in calculating net income
(loss) per share - basic 41,094 40,376 40,953 39,284
======== ======== ======== ========
Shares used in calculating net income
(loss) per share - diluted 41,094 43,390 40,953 42,773
======== ======== ======== ========
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE> 5
ESS TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
-------------------
Sept. 30, Sept. 30,
1998 1997
----------- -----------
<S> <C>
Cash flows from operating activities:
Net income loss $ (32,784) $ 1,172
Adjustments to reconcile net income (loss)
to net cash used in operating activities:
Depreciation and amortization 9,430 5,026
Charges for research and development in-process -- 22,200
Changes in assets and liabilities:
Accounts receivable 2,740 (14,943)
Inventories 15,349 (3,266)
Prepaid expenses and other assets 10,950 5,984
Accounts payable and accrued expenses (6,238) (32,258)
Income taxes payable (1,126) (2,994)
----------- --------
Net cash provided by (used in) operating activities (1,679) (19,079)
----------- --------
Cash flows from investing activities:
Acquisition of property and equipment (9,999) (10,398)
Sale of marketable securities and
short-term investments 18,023 18,889
Purchase of marketable securities and
short-term investments (11,029) (1,020)
Cash received from acquisitions -- 2,529
----------- --------
Net cash provided by (used in) investing activities (3,005) 10,000
----------- --------
Cash flows from financing activities:
Issuance of common stock, net 827 2,397
----------- --------
Net cash provided by financing activities 827 2,397
----------- --------
Net increase (decrease) in cash and cash equivalents (3,857) (6,882)
Cash and cash equivalents at beginning of period 27,760 43,055
----------- --------
Cash and cash equivalents at end of period $ 23,903 $ 42,373
=========== ========
Supplemental disclosures of cash flow information:
Common stock issued for acquisitions -- $ 32,703
=========== ========
Income taxes $ -- $ 18,500
=========== ========
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE> 6
ESS TECHNOLOGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The unaudited Consolidated Financial Statements have been prepared by the
Company pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. In the opinion of management, the financial statements reflect all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair statement of the financial position, operating results and cash flows for
those periods presented. These Consolidated Financial Statements should be read
in conjunction with the Consolidated Financial Statements and notes thereto for
the years ended December 31, 1997 and 1996, included in the Company's Form 10-K.
The results of operations for the interim periods are not necessarily indicative
of the results that may be expected for the fiscal year which ends December 31,
1998 or for any other period.
NOTE 2. BALANCE SHEET COMPONENTS (IN THOUSANDS)
<TABLE>
<CAPTION>
Sept. 30, Dec. 31,
1998 1997
-------- --------
<S> <C> <C>
Accounts receivable:
Accounts receivable $ 35,415 $ 37,251
Less: Allowance for doubtful accounts (1,890) (986)
-------- --------
$ 33,525 $ 36,265
======== ========
Inventories:
Raw materials $ 3,781 $ 1,776
Work-in-process 17,310 18,237
Finished goods 10,845 27,272
-------- --------
$ 31,936 $ 47,285
======== ========
</TABLE>
NOTE 3. DEBT
The Company has a secured line of credit agreement with a foreign bank of $15
million which expires on October 1, 2001. Under the terms of the agreement, the
Company may borrow at a rate of LIBOR plus 1.5% or at the foreign bank's prime
lending rate. The line of credit requires the Company to achieve certain
financial ratios and operating results. The line is secured by land and
buildings. There was no borrowing under the line of credit as of September 30,
1998.
NOTE 4. SHAREHOLDERS' EQUITY
On August 20, 1998, the Compensation Committee of the Company's Board of
Directors announced that it had reviewed the status of outstanding options
issued to employees and consultants of the Company and offered to exchange those
options held with an exercise price exceeding the closing price of the Company's
Common Stock on August 24, 1998 (the "New Price") for options with an exercise
price equal to the New Price and with the same original vesting start date and
vesting schedule as the exchanged option, but with a restriction on the
exerciseability of such repriced options until August 25, 1999. If an employee
voluntarily terminates his or her employment prior to the end of the term of the
restriction on exerciseability, the exchange options will be forfeited. Pursuant
to the repricing, approximately 3,559,378 options with an exercise price
greater than $2.69 were exchanged for options with an exercise price of $2.69.
NOTE 5. REVENUE RECOGNITION
Revenue from products sales is recognized at the time of shipment except for
certain shipments to distributors with rights of return and allowances, in which
case revenue is deferred until the distributor resells the product. For sales
recognized at the time of shipment, reserves for estimated returns and price
adjustments are provided at the time of shipment.
<PAGE> 7
NOTE 6. NET INCOME PER SHARE
Earnings per share are calculated in accordance with the provisions of
Statement of Financial Accounting Standard No. 128 -- "Earnings per Share" (SFAS
No. 128), effective for 1997. SFAS No. 128 requires the Company to report both
basic earnings per share, which is based on the weighted-average number of
common shares outstanding, and diluted earnings per share, which is based on the
weighted-average number of common shares outstanding and all dilutive potential
common shares outstanding. All prior years' earnings per share data in this
report have been recalculated to reflect the provisions of SFAS No. 128. All
earnings per share data in this report reflect basic earnings per share, unless
otherwise indicated.
(In thousands, except per-share amounts)
<TABLE>
<CAPTION>
Three Months Ended
Sept. 30, 1998 Sept. 30, 1997
----------------------------- -----------------------------
Per Per
Income Share Income Share
(Loss) Shares Amount (Loss) Shares Amount
------ ------- ------ ------ ------- ------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS:
Net income (loss) $(7,469) 41,094 $(0.18) $1,718 40,376 $0.04
------ -----
Effects of Dilutive
Securities:
Stock options -- -- -- 3,014
------- ------ ------ ------
Diluted EPS:
Net income (loss) $(7,469) 41,094 $(0.18) $1,718 43,390 $0.04
======= ====== ====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended
Sept. 30, 1998 Sept. 30, 1997
------------------------------ -----------------------------
Per Per
Income Share Income Share
(Loss) Shares Amount (Loss) Shares Amount
------ ------- ------ ------ ------- ------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS:
Net income (loss) $(32,784) 40,953 $(0.80) $1,172 39,284 $0.03
------ -----
Effects of Dilutive
Securities:
Stock options -- -- -- 3,489
-------- ------ ------ ------
Diluted EPS:
Net income (loss) $(32,784) 40,953 $(0.80) $1,172 42,773 $0.03
======== ====== ====== ====== ====== =====
</TABLE>
<PAGE> 8
NOTE 7. WAFER CAPACITY COMMITMENTS
In November 1995, the Company entered into agreements with two wafer
foundries, Taiwan Semiconductor Manufacturing Company Ltd. ("TSMC") and United
Microelectronics Corporation ("UMC"), in which the Company secured access to
additional manufacturing capacity and to certain technology.
Under the TSMC agreement, in exchange for TSMC's increased wafer capacity
commitments, the Company committed to pay approximately $32 million during 1996
and 1997 as deposits for wafers through 1999. The cash requirements associated
with this agreement were two $16 million payments due on June 30, 1996 and 1997.
The Company issued two promissory notes totaling $32 million securing these
payments which were cancelled subsequent to the payments in 1996 and 1997. The
payments can be applied to offset wafers purchased from 1996 to 1999 provided
that the Company purchases not less than a certain specified number of wafers
during each of the four years ending December 31, 1999. As of September 30,
1998, $21.9 million of the payment had been applied and $10.1 million was
included in long term other assets.
Under the UMC agreement, the Company entered into a joint venture arrangement
with UMC, together with other US semiconductor companies, to build a separate
semiconductor manufacturing facility located in Taiwan at an estimated cost of
$1 billion. The Company has completed its investment commitment of $24.6 million
in the joint venture. Under the terms of the agreement, the Company received an
approximate 5% equity ownership in the joint venture company and certain
capacity rights. The facility was expected to open during 1998, but fires during
construction have delayed the opening. UMC has stated that it expects insurance
will cover its fire losses. In October 1998, the Company sold approximately 91%
of its investment in the joint venture to UMC for approximately $22.5 million.
See "--Note 10. Subsequent Event."
NOTE 8. LITIGATION
On March 11, 1998, Creative Technology, Ltd. and E-mu Systems Incorporated
(together "Creative") filed a lawsuit against the Company and Diamond Multimedia
Incorporated ("Diamond") alleging that the Company's Maestro family of products
infringed upon an E-mu patent which has been exclusively licensed by Creative.
The complaint sought an injunction against future infringement, damages for past
infringement, fees and costs. On September 25, 1998, the lawsuit between the
Company and Creative was settled to the parties' mutual satisfaction, and ESS is
now under a license from Creative regarding sales of its Maestro products.
Further terms of the settlement are confidential.
NOTE 9. CEO PURCHASE OF SHARES
On April 28, 1998, the Company's Chief Executive Officer and Chairman of the
Board of Directors, Fred S. L. Chan, and his spouse, Annie M. H. Chan, a
director of the Company, and certain trusts for the benefit of the Chan's
children and certain charities beneficially owned in the aggregate, 37% of the
common stock of the Company as of September 30, 1998, announced that they would
jointly purchase between $5 million and $10 million of the Company's common
stock on the open market. As of September 30, 1998, such purchases had totaled
$1.4 million, representing 241,000 shares at prices ranging from $5.15 to $6.56.
NOTE 10. SUBSEQUENT EVENT
On October 17, 1998, the Company entered into an agreement with UMC to sell
UMC approximately 63.8 million shares of stock of the joint venture for a
purchase price of $22.5 million dollars. The Company received the cash on
October 23, 1998. Following the sale, the Company continues to hold 6,000,000
shares of the stock of the joint venture.
On October 20, 1998, the Company's Board of Directors authorized the
repurchase, at management's discretion, of up to $7.0 million dollars of the
Company's shares of common stock at market prices and as the market and business
conditions warrant. At November 12, 1998, the Company had repurchased 197,500
shares at market prices ranging from $3.17 to 4.50 per share.
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Statements contained in this discussion that are not statements of historical
fact may be deemed to be forward-looking. A number of important factors could
cause actual events or the Company's actual results to differ materially from
those indicated by such forward-looking statements, including dependence on
continued growth in demand for multimedia capabilities for the PC marketplace as
well as the market for consumer electronic products; the Company's ability to
take advantage of new markets; increased competition and pricing pressures;
general economic conditions specific to the semiconductor industry; the timing
and market acceptance of new product introductions; the timely development of
new products; continued availability of quality foundry capacity; the timely
completion of the Company's Year 2000 project; and other risks set forth in this
filing and in the Company's filings from time to time with the Securities and
Exchange Commission.
This information should be read along with the unaudited Condensed
Consolidated Financial Statements and notes thereto included in Item I of this
Quarterly Report and the audited Consolidated Financial Statements and notes
thereto and Management's Discussion and Analysis of Financial Condition and
Results of Operations for the fiscal years ended December 31, 1997 and 1996,
contained in the Company's Annual Report filed on Form 10-K.
RESULTS OF OPERATIONS
The following table discloses key elements of the statements of operations,
expressed as a percentage of revenues.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
-------------------------- ----------------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net revenues 100.0% 100.0% 100.0% 100.0%
Cost of revenues 83.5 67.5 90.1 58.3
----- ----- ----- -----
Gross margin 16.5 32.5 9.9 41.7
Operating expenses:
Research and development 15.5 16.0 16.5 11.7
Research and development in-process -- -- -- 12.4
Selling, general and administrative 16.9 12.1 18.9 9.8
----- ------ ----- -----
Operating income (loss) (15.9) 4.4 (25.5) 7.8
Nonoperating income, net 0.9 0.8 0.8 1.0
----- ------ ----- -----
Income (loss) before provision for income taxes (15.0) 5.2 (24.7) 8.8
Provision for (benefit from) income taxes 0.7 1.9 1.3 8.2
----- ------ ----- -----
Net income (loss) (14.3) 3.3% (23.4) 0.6%
===== ====== ===== =====
</TABLE>
Net Revenues. The Company's net revenues increased 0.3% to $52.3 million in
the third quarter of 1998 from $52.2 million in the third quarter of 1997. The
increase in net revenues was a result of gains in overall unit shipment offset
in part by lower unit selling prices. International revenues accounted for a
substantial majority of the Company's net revenues in the third quarter of 1998
and 1997, respectively.
Gross Profit. The Company's gross profit decreased by 49.2% to $8.6 million
in the third quarter of 1998 from $17.0 million in the third quarter of 1997.
The decrease in gross profit was the result of lower unit selling prices on
increased unit shipments of the Company's PC audio and video semiconductor
products as well as increased obsolescence reserves for modem products. The
Company's overall gross margin is subject to change due to various factors,
including among others, competitive product pricing, market demand, yields,
wafer costs and product mix. The Company continues to experience significant
price competition in the marketplace. The Company expects that overall
<PAGE> 10
average selling prices for its existing products will continue to decline over
time and that selling prices for each product will decline significantly over
the life of the product. The Company believes that in order to increase gross
profit, it must ship higher unit volumes, reduce costs, add new features or
introduce new products that gain market acceptance. However, no assurance can be
given that the Company will be able to achieve these objectives.
Research and Development. Research and development expenses were $8.1 million
and $23.2 million in the third quarter and first nine months of 1998,
respectively, compared to $8.3 million and $21.0 million in the third quarter
and first nine months of 1997, respectively. Research and development in the
first nine months of 1997 excludes a one-time pre and post-tax charge of $22.2
million related to acquired research and development in-process from the
acquisition of Platform Technologies, Inc. ("Platform"). The increase for the
first nine months of 1998 was primarily due to the increase in the Company's
engineering staff, the amortization of acquisition expenses and a one-time
charge for impaired assets related to a previous acquisition, offset by lower
mask and engineering test run charges.
Selling, General and Administrative. Selling, general and administrative
expenses were $8.8 million and $26.5 million in the third quarter and first nine
months of 1998, respectively, compared to $6.3 million and $17.5 million in the
third quarter and first nine months of 1997. The increase was due to higher
personnel expense and consulting expenses associated with the Company's
conversion to a new management information system and the amortization of
acquisition expenses and a one-time charge for impaired assets related to a
previous acquisition.
Non-Operating Income, Net. Non-operating income, net was $0.5 million and
$1.2 million in the third quarter and first nine months of 1998 compared to $0.4
million and $1.9 million in the third quarter and first nine months of 1997.
Non-operating income, net consisted of interest income net of interest expense
and gains on sale of securities.
Provision for Income Taxes. The Company's effective tax rate was (4.9%) and
(5.0)% for the third quarter and first nine months of 1998, respectively. The
effective tax rate for the third quarter and first nine months of 1997 of 37.4%
and 38.5%, respectively, reflects the statutory tax rates applied to the
Company's profits during that quarter excluding the one time pre- and post-tax
charge of $22.2 million related to acquired research and development credits
in-process from the acquisition of Platform in the second quarter of 1997. The
Company's pro forma tax rate for the first nine months of 1997 was lower than
the combined federal and state statutory rates as a result of tax exempt
interest income and research and development credits. The effective tax rate for
the third quarter and first nine months of 1998 was affected by inventory
reserves taken in the Company's offshore subsidiary at a zero tax benefit.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has financed its cash requirements from cash
generated from operations, the sale of equity securities, bank lines of credit
and long-term and short-term debt. At September 30, 1998, ESS had cash and cash
equivalents and short-term investments of $31.4 million and working capital of
$54.9 million. As of September 30, 1998, the Company had a line of credit for
$15 million, which will expire on October 1, 2001. There were no borrowings
under the line of credit as of September 30, 1998.
In the first nine months of 1998, the Company decreased its cash balances by
$3.9 million. Operating activities used cash of $1.7 million, consisting of a
net loss of $(32.8) million, offset by depreciation and amortization of $9.4
million and changes in working capital and other assets of $21.7 million. The
Company invested $10.0 million in property and equipment, primarily for the
construction of new buildings and for the purchase of computer hardware and
software. The Company received $7.0 million from the net sales of marketable
securities and short term investments and $0.8 million from the exercise of
stock options.
<PAGE> 11
The Company believes that, as of September 30, 1998, cash flows from
operations, along with cash available and other assets that could be converted
to cash will be sufficient to fund operations, acquisitions of property and
equipment and provide adequate working capital through the next twelve months.
Capital expenditures for the next twelve months are anticipated to be
approximately $9.8 million which will be used to acquire capital equipment. The
Company may also utilize cash to acquire or invest in complementary businesses
or products, to obtain the right to use complementary technologies or to
repurchase stock. From time to time, in the ordinary course of business, the
Company may evaluate potential acquisitions of or investment in such businesses,
products or technologies owned by third parties. However, the Company has no
present understandings, commitments or agreements with respect to any material
acquisition of or investments in other businesses, products or technologies.
YEAR 2000 ISSUES
General. The Company is currently conducting a company-wide Year 2000
readiness program ("Y2K Program"). The Y2K Program is addressing the issue of
computer programs and embedded computer chips being unable to distinguish
between the year 1900 and the year 2000. Therefore, some computer hardware and
software will need to be modified prior to Year 2000 in order to remain
functional. The Company anticipates that Year 2000 compliance will be
substantially complete by June 1999.
Year 2000 Program. The Company's Year 2000 Program is divided into four major
sections--ESS manufactured products, internal information ("IT") system, non-IT
system (e.g., testing equipment), and third-party suppliers and customers. The
general phases common to all sections are: (1) inventorying Year 2000 items; (2)
assessing the Year 2000 compliance of items determined to be material to the
company; and (3) repairing or replacing material items that are determined not
to be Year 2000 compliant.
The Company has reviewed substantially all ESS manufactured products for Year
2000 compliance purposes; it plans to complete the review of all such products
by the end of 1998. The Company believes that substantially all of the Company's
products are Year 2000 compliant and that those that are not Year 2000 compliant
can be upgraded to be Year 2000 compliant by June, 1999.
With respect to its internal IT computer systems, the Company has completed
the inventory and review phases of the Y2K Program and has been in the repair or
replacement phase. In February 1998, the Company began to install Year 2000
compliant programs from Oracle Corporation for approximately 80 percent of its
business system. This installation was about 85 percent complete as of the end
of third quarter. It is anticipated that this installation will be fully
implemented by the end of 1998. With respect to the remaining internal IT
computer systems that are not yet Year 2000 compliant, the Company plans to
either replace or upgrade them by the end of September 1999.
The Company has completed the inventory phase of its non-IT systems. It is
currently reviewing the Year 2000 compatibility of its non-IT systems. It is
expected to complete the review by the end of 1998. To date, about 75 percent of
its non-IT systems are Year 2000 compliant. The Company plans to repair or
replace those that are not yet Year 2000 compliant by the end of March 1999.
The Company has been working with its key suppliers and contract
manufacturers to assess the possible effects of their Year 2000 readiness on the
Company's operations. Although these suppliers and contract manufacturers have
notified the Company that they have been addressing the problem, they have not
provided specific assurance regarding the Year 2000 compliance of their systems
and software. The Company's reliance on suppliers and contract manufacturers
and, therefore, on the proper functioning of their information systems and
software, means that failure of such key suppliers and contract manufacturers to
address Year 2000 issues could have a material impact on the Company's
operations and financial results; however, the potential impact and related
costs are not known at this time.
Costs of Assessment and Modification. The total cost associated with required
modifications to become Year 2000 compliant is not expected to be material to
the Company's financial position. Through June 30, 1998, the Company has spent
$2.5 million to implement Year 2000 compliant programs from Oracle Corporation.
The Company estimates that it may spend up to an additional $250,000 for other
replacements or upgrades and for communicating with key suppliers and customers.
Risks. The failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the Company's
results of operations, liquidity and financial condition. Due to the general
uncertainty inherent in the Year 2000 problem resulting in part from the
uncertainty of the Year 2000 readiness of third-party suppliers and customers,
the Company is unable to determine at this time whether the consequences of Year
2000 failures will have a material impact on the Company's results of
operations, liquidity or financial condition. The Company believes that its Year
2000 Program will help to significantly reduce the Company's level of
uncertainty about the Year 2000 problem and, in particular, about the Year 2000
compliance and readiness of its material key suppliers and customers. The
Company believes that, with the implementation of new business systems and
completion of the Year 2000 Program as scheduled, the possibility of significant
interruptions of normal operations should be reduced.
The Company does not yet have a contingency plan to address the Year 2000
problem, but it is expected to create one by the end of 1998.
<PAGE> 12
FACTORS THAT MAY AFFECT FUTURE RESULTS
Except for the historical information contained in this Quarterly Report on
Form 10-Q, the matters discussed in this report are forward looking statements
which involve risks and uncertainties that could cause actual results to differ
from those indicated by such forward looking statements. Such risks and
uncertainties include but are not limited to those set forth below. In any
event, the matters set forth below should be carefully considered when
evaluating the Company's business and prospects.
Potential Fluctuations in Operating Results. The Company's operating results
are subject to quarterly and other fluctuations due to a variety of factors,
including the gain or loss of significant customers, increased competitive
pressures, changes in pricing policies by the Company, its competitors or its
suppliers, including decreases in unit average selling prices ("ASPs") of the
Company's products, the timing of new product announcements and introductions by
the Company or its competitors and market acceptance of new or enhanced versions
of the Company's and its customers' products. Other factors include the
availability of foundry capacity, fluctuations in manufacturing yields,
availability and cost of raw materials, changes in the mix of products sold, the
cyclical nature of both the semiconductor industry and the market for PCs,
seasonal customer demand, the timing of significant orders and significant
increases in expenses associated with the expansion of operations. The Company's
operating results could also be adversely affected by economic conditions
generally in various geographic areas where the Company or its customers do
business, or order cancellations or rescheduling. These factors are difficult to
forecast, and these or other factors could materially affect the Company's
quarterly or annual operating results. There can be no assurance as to the level
of sales or earnings that may be attained by the Company in any given period in
the future. The Company currently places noncancelable orders to purchase its
products from independent foundries on an approximately three month rolling
basis, while its customers generally place purchase orders with the Company less
than four weeks prior to delivery that may be canceled without significant
penalty. Consequently, if anticipated sales and shipments in any quarter are
canceled or do not occur as quickly as expected or forecasted sales levels are
not realized, expense and inventory levels could be disproportionately high and
the Company's business, financial condition and results of operations could be
materially adversely affected.
Competition; Pricing Pressures. The markets in which the Company competes are
intensely competitive and are characterized by rapid technological change, price
declines and rapid product obsolescence. The Company currently competes with
add-in card suppliers and other semiconductor manufacturers. The Company expects
competition to increase in the future from existing competitors and from other
companies that may enter the Company's existing or future markets with products
that may be at lower costs or provide higher levels of integration, higher
performance or additional features. The Company is unable to predict the timing
and nature of any such competitive product offerings. The announcement and
commercial shipment of competitive products could adversely affect sales of the
Company's products and may result in increased price competition that would
adversely affect the ASPs and margins of the Company's products. In general,
product prices in the semiconductor industry have decreased over the life of a
particular product. The markets for most of the applications for the Company's
products are characterized by intense price competition. The willingness of
prospective customers to design the Company's products into their products
depends to a significant extent upon the ability of the Company to sell its
products at a price that is cost-effective for such customers. As the markets
for the Company's products mature and competition increases, the Company
anticipates that prices for its products will continue to decline. If the
Company is unable to reduce its costs sufficiently to offset declines in product
prices or is unable to introduce more advanced products with higher product
prices, the Company's business, financial condition and results of operations
would be materially adversely affected.
The Company's existing and potential competitors consist principally of large
domestic and international companies that have substantially greater financial,
manufacturing, technical, marketing, distribution and other resources, greater
intellectual property rights, broader product lines and longer-standing
relationships with customers than the Company. The Company's competitors also
include a number of smaller and emerging companies. The Company's principal
audio competitors include Cirrus Logic, Creative Technology and Yamaha. The
Company's principal video competitors include C-Cube, Windbond, LSI Logic and
SGS Thompson. The Company's principal modem competitors include Cirrus Logic,
Lucent, Rockwell, 3Com and Texas Instruments. Certain of the Company's current
and potential competitors maintain their own semiconductor foundries and may
therefore benefit from certain capacity, cost and technical advantages. The
Company believes that its ability to compete successfully depends on a number of
factors, both within and outside of its control, including the price, quality
and performance of the Company's and its competitors' products, the timing and
success of new product introductions by the Company, its customers and its
competitors, the emergence of new multimedia standards, the development of
technical innovations, the ability to obtain adequate foundry capacity and
sources of raw materials, the efficiency of production, the rate at which the
Company's customers design the Company's products into their products, the
number and nature of the Company's competitors in a given market, the assertion
of intellectual property rights and general market and economic conditions.
There can be no assurance that the Company will be able to compete successfully
in the future.
Each successive generation of microprocessors and operating system software
has provided increased performance, which could in the future result in a
microprocessor and/or operating system software capable of performing multimedia
functions. In this regard, Intel Corporation has developed Native Signal
Processing ("NSP") capability and an extended multimedia system architecture
("MMX") for use in conjunction with its Pentium microprocessor, and is promoting
the processing power of the Pentium for data and signal intensive functions such
as graphics acceleration and other multimedia functions. Additionally, Microsoft
Corporation may incorporate certain multimedia capabilities into its operating
system software. There can be no assurance that the increased capabilities of
microprocessors and operating system software will not adversely affect demand
for the Company's products.
Dependence on the PC and Consumer Markets. In the third quarter and first
nine months of 1997 and 1998, sales of PC audio semiconductor chips accounted
for a majority of the Company's net revenues, and the Company expects that sales
of audio semiconductors will continue to account for a significant portion of
its net revenues for the foreseeable future. In the third quarter and first nine
months of 1997 and 1998, sales of video semiconductor chips to the video compact
disk ("VCD") player market accounted for a significant portion of the Company's
revenues. Any reduction in ASPs or demand for the Company's semiconductor chips,
whether because of a reduction in demand for PCs or
<PAGE> 13
VCD players in general, increased competition or otherwise, would have a
material adverse effect on the Company's business, financial condition and
results of operations.
The Company is currently engaged in the development and introduction of new
PC audio, video and modem semiconductor devices for the PC and consumer
markets. There can be no assurance that the Company will be able to identify
market trends or new product opportunities, develop and market new products,
achieve design wins or respond effectively to new technological changes or
product announcements by others. A failure in any of these areas would have a
material adverse effect on the Company's business, financial condition and
results of operations.
The Company's products are sold for incorporation into desktop and notebook
computers and VCD players. Therefore, the Company is heavily dependent on the
growth of the markets and the cost requirements for desktop and notebook
computers and VCD players. There can be no assurance that these markets will be
able to grow. A slowing in unit volume and a decrease in ASPs could result in a
decline in revenues which would have a material adverse effect on the Company's
business, financial condition and results of operations.
Importance of New Products and Technological Change. The markets for the
Company's products are characterized by evolving industry standards, rapid
technological change and product obsolescence. The Company's success is highly
dependent upon the successful development and timely introduction of new
products at competitive price and performance levels. The success of new
products depends on a number of factors, including timely completion of product
development, market acceptance of the Company's and its customers' new products,
securing sufficient foundry capacity for volume manufacturing of wafers,
achievement of acceptable wafer fabrication yields by the Company's independent
foundries and the Company's ability to offer new products at competitive prices.
In order to succeed in having the Company's products incorporated into new
products being designed by its customers, the Company must anticipate market
trends and meet performance, quality and functionality requirements of such OEMs
and must successfully develop and manufacture products that adhere to these
requirements. In addition, the Company must meet the timing and price
requirements of such manufacturers and must make such products available in
sufficient quantities. Accordingly, in selling to original equipment
manufacturers ("OEMs"), the Company can often incur significant expenditures
prior to volume sales of new products, if any. In order to help accomplish these
goals, the Company has in the past and will continue to consider in the future
the acquisition of other companies or the products and technologies of other
companies. Such acquisitions carry additional risks such as a lack of
integration with existing products and corporate culture, the potential for
large write-offs and the diversion of management attention. There can be no
assurance that the Company will be able to identify market trends or new product
opportunities, develop and market new products, achieve design wins or respond
effectively to new technological changes or product announcements by others. A
failure in any of these areas would have a material adverse effect on the
Company's business, financial condition and results of operations.
Dependence on TSMC and Other Third Parties. The Company relies on independent
foundries to manufacture all of its products. A substantial majority of the
Company's products are currently manufactured by TSMC, which has manufactured
certain of the Company's products since 1989. The Company also has foundry
arrangements with UMC, which has manufactured certain of the Company's products
since 1995. These relationships provide the Company with access to advanced
process technology necessary for the manufacture of the Company's products.
These foundries fabricate products for other companies and, in certain cases,
manufacture products of their own design. In November 1995, the Company entered
into long-term agreements with TSMC and UMC in which the Company has secured
access to additional capacity and to leading edge technology.
While the Company has entered into long-term agreements with its two
foundries, the Company's reliance on these independent foundries involves a
number of risks, including the absence of adequate capacity, the unavailability
of, or interruption in access to, certain process technologies and reduced
control over delivery schedules, manufacturing yields and costs, and the
international risks more fully described
<PAGE> 14
below. In addition, the Company has pre-negotiated certain of its purchase
orders and could be unable to benefit from enhanced yields realized by its
vendors. The Company expects to rely upon TSMC and UMC to manufacture
substantially all of the Company's products for the foreseeable future. In the
event that TSMC and UMC are unable to continue to manufacture the Company's key
products in required volumes, the Company will have to identify and secure
additional foundry capacity. In such an event, the Company may be unable to
identify or secure additional foundry capacity from another manufacturer. Even
if such capacity is available from another manufacturer, the qualification
process could take six months or longer. The loss of any of its foundries as a
supplier, the inability of the Company to acquire additional capacity at its
current suppliers or qualify other wafer manufacturers for additional foundry
capacity should additional capacity be necessary, or any other circumstances
causing a significant interruption in the supply of semiconductors to the
Company would have a material adverse effect on the Company's business,
financial condition and results of operations.
To address potential foundry capacity constraints in the future, ESS will
continue to consider and may be required to enter into additional arrangements,
including equity investments in or loans to independent wafer manufacturers in
exchange for guaranteed production capacity, joint ventures to own and operate
foundries, or "take or pay" contracts that commit the Company to purchase
specified quantities of wafers over extended periods. Any such arrangements
could require the Company to commit substantial capital and grant licenses to
its technology. The need to commit substantial capital may require the Company
to obtain additional debt or equity financing, which could result in dilution to
the Company's shareholders. There can be no assurance that such additional
financing, if required, will be available when needed or, if available, will be
obtained on terms acceptable to the Company.
Customer Concentration. A limited number of customers have accounted for a
substantial portion of the Company's net revenues. In the third quarter of
1998, sales to the Company's top five customers, including sales to a
distributor, accounted for approximately 43% of the Company's net revenues. In
the third quarter of 1997, the top five customers, including sales to its
distributors, accounted for approximately 47% of the Company's net revenues.
Sales to distributors are generally subject to agreements allowing limited
rights of return and price protection with respect to unsold products. Returns
and allowances in excess of reserves could have a material adverse impact on the
Company's business, financial condition and results of operation. During 1997,
the Company adopted a policy of deferring revenue recognition on sales of
devices to distributors in Hong Kong and Taiwan until devices are sold to the
end customers. This has led to increased operational visibility on product
moving through the channel. The Company expects that a limited number of
customers may account for a substantial portion of its net revenues for the
foreseeable future. The Company has experienced changes from year to year in the
composition of its major customer base and believes this pattern may continue.
The Company does not have long-term purchase agreements with any of its
customers. The reduction, delay or cancellation of orders from one or more major
customers for any reason or the loss of one or more of such major customers
could materially and adversely affect the Company's business, financial
condition and results of operations. In addition, since the Company's products
are often sole sourced to its customers, the Company's operating results could
be materially and adversely affected if one or more of its major customers were
to develop other sources of supply. There can be no assurance that the Company's
current customers will continue to place orders with the Company, that orders by
existing customers will not be canceled or will continue at the levels of
previous periods or that the Company will be able to obtain orders from new
customers.
Management of Growth. The Company has experienced significant growth in unit
shipments and the addition of multiple product lines that require additional
management systems and processes. To manage its future operations and growth
effectively, the Company will need to hire and retain management, hire, train,
motivate, manage and retain its employees, continue to improve its operational,
financial and management information systems and implement additional systems
and controls. There can be no assurance that the Company will be able to manage
such growth effectively, and the failure to do so could have a material adverse
effect on the Company's business, financial condition and results of operations.
In addition, the Company has implemented an enterprise-wide software package
that integrates its core business functions. Should the implementation be
incomplete or otherwise problematic, substantial disruption to the business
operations of the Company could result. There can be no assurance that the
software implementation will not cause business disruptions to the Company.
<PAGE> 15
International Operations. During the first nine months of 1998 and 1997,
international sales accounted for a substantial majority of the Company's net
revenues. Substantially all of the Company's international sales were to
customers in Hong Kong, Taiwan, Singapore, Japan and Korea. The Company expects
that international sales will continue to represent a significant portion of its
net revenues for the foreseeable future. In addition, substantially all of the
Company's products are manufactured, assembled and tested by independent third
parties in Asia. Due to its reliance on international sales and foreign
third-party manufacturing, assembly and testing operations, the Company is
subject to the risks of conducting business outside of the United States. These
risks include unexpected changes in, or impositions of legislative or regulatory
requirements, delays resulting from difficulty in obtaining export licenses for
certain technology, tariffs, quotas and other trade barriers and restrictions,
longer payment cycles, greater difficulty in accounts receivable collection,
potentially adverse taxes, the burdens of complying with a variety of foreign
laws and other factors beyond the Company's control. The Company is also subject
to general geopolitical risks in connection with its international trade
relationships. Although the Company has not to date experienced any material
adverse effect on its business, financial condition or results of operations as
a result of such regulatory, geopolitical and other factors, there can be no
assurance that such factors will not have a material adverse effect on the
Company's business, financial condition and results of operations in the future
or require the Company to modify its current business practices.
In addition, the laws of certain foreign countries in which the Company's
products are or may be manufactured or sold, including various countries in
Asia, may not protect the Company's products or intellectual property rights to
the same extent as do the laws of the United States and thus make the
possibility of piracy of the Company's technology and products more likely.
Currently, all of the Company's product sales and all of its arrangements with
foundries and assembly and test vendors provide for pricing and payment in U.S.
dollars. In 1997 and 1998, the effect of significant currency fluctuations in
Asia had no material impact on the Company. There can be no assurance that
future fluctuations in currency exchange rates will not have a material adverse
effect on the Company's business, financial condition and results of operations.
To date the Company has not engaged in any currency hedging activities, although
the Company may do so in the future. Further, there can be no assurance that one
or more of the foregoing factors will not have a material adverse effect on the
Company's business, financial condition and results of operations or require the
Company to modify its current business practices.
Semiconductor Industry. The semiconductor industry has historically been
characterized by rapid technological change, cyclical market patterns,
significant price erosion, periods of over-capacity and production shortages,
variations in manufacturing costs and yields and significant expenditures for
capital equipment and product development. In addition, the industry has
experienced significant economic downturns at various times, characterized by
diminished product demand and accelerated erosion of product prices. The Company
may experience substantial period-to-period fluctuations in operating results
due to general semiconductor industry conditions.
Uncertainty Regarding Patents and Protection of Proprietary Rights. The
Company relies on a combination of patents, trademarks, copyrights, trade secret
laws and confidentiality procedures to protect its intellectual property rights.
As of September 30, 1998, the Company had 9 patents granted in the United
States, which expire over time, commencing in 1999 and ending in 2015, and 12
corresponding foreign patents. In addition, the Company intends to seek further
United States and international patents on its technology. There can be no
assurance that patents will be issued from any of the Company's pending
applications or applications in preparation or that any claims allowed from
pending applications or applications in preparation will be of sufficient scope
or strength, or be issued in all countries where the Company's products can be
sold, to provide meaningful protection or any commercial advantage to the
Company. Also, competitors of the Company may be able to design around the
Company's patents. The laws of certain foreign countries in which the Company's
products are or may be designed, manufactured or sold, including various
countries in Asia, may not protect the Company's products or intellectual
property rights to the same extent as do the laws of the Untied States and thus
make the possibility of piracy of the Company's technology and products more
likely. Although the Company is not aware of the development, distribution or
sales of any illegal copies of the Company's hardware or software, any
infringements of its patents, copy rights or trademarks, or any violation of its
trade secrets, confidentiality procedures or licensing agreements to date, there
can be no assurance that the steps taken by the Company to protect its
proprietary information will be adequate to prevent misappropriation of its
technology or that the company's competitors will not independently develop
technologies that are substantially equivalent or superior to the Company's
technology.
The semiconductor industry is characterized by vigorous protection and
pursuit of intellectual property rights or positions, which have resulted in
significant and often protracted and expensive litigation. As of September 30,
1998, there was no pending intellectual property litigation against the Company.
However, the Company or its foundries may from time to time receive notice of
claims that the Company has infringed patents or other intellectual property
rights owned by others. The Company may seek licenses under such patents or
other intellectual property rights. However, there can be no assurance that
licenses will be offered or that the terms of any offered licenses will be
acceptable to the Company. The failure to obtain a license from a third party
for technology used by the Company could cause the Company to incur substantial
liabilities and to suspend the manufacture of products or the use by the
Company's foundries of processes requiring the technology. Furthermore, the
Company may initiate claims or litigation against third parties for infringement
of the Company's proprietary rights or to establish the validity of the
Company's proprietary rights. Litigation by or against the Company could result
in significant expense to the Company and divert the efforts of the Company's
technical and management personnel, whether or not such litigation results in a
favorable determination for the Company. In the event of an adverse result in
any such litigation, the Company could be required to pay substantial damages,
cease the manufacture, use and sale of infringing products, expend significant
resources to develop non-infringing technology, discontinue the use of certain
processes or obtain licenses for the infringing technology. There can be no
assurance that the Company would be successful in such development or that such
licenses would be available on reasonable terms, or at all, and any such
development or license could require expenditures by the Company of substantial
time and other resources. Although patent disputes in the semiconductor industry
have often been settled through cross-licensing arrangements, there can be no
assurance that in the event that any third party makes a successful claim
against the Company or its customers, a cross-licensing arrangement could be
reached. In such a case, if a license is not made available to the Company on
commercially reasonable terms, the Company's business, financial condition and
results of operations could be materially adversely affected.
The Company currently licenses certain of the technology utilized by the
Company in its products, and expects to continue to do so in the future. The
Company has no current plans to grant licenses with respect to its products or
technology; however, it may become necessary for the Company to enter into
product licenses in the future in order, among other things, to secure foundry
capacity. Although the Company has in the past granted licenses to certain of
its technology, some of which have expired, such licenses have been limited and
the Company has not derived material revenues from such licenses in recent
periods.
Dependence on Key Personnel. The Company's success depends to a significant
degree upon the continued contributions of Fred S.L. Chan, the Company's Chief
Executive Officer and Chairman of the Board of Directors. As of September 30,
1998, Mr. Chan, together with his spouse, Annie M.H. Chan, a director of the
Company, and certain trusts for the benefit of the Chan's children and certain
charities beneficially owned in the aggregate, 37% of the Company's Common
Stock. Additionally, Fred S.L. Chan and Annie M.H. Chan announced on April 28,
1998, that they would be purchasing between $5 and $10 million of the Company's
common stock on the open market. As of September 30, 1998, such purchases had
totaled $1.4 million representing 241,000 shares at prices ranging from $5.15 to
$6.56.
<PAGE> 16
The present and future success of the Company depends on its ability to
continue to attract, retain and motivate qualified senior management, sales and
technical personnel, particularly highly skilled semiconductor design personnel
and software engineers, for whom competition is intense. The loss of Mr. Chan,
other key executive officers, key design personnel or software engineers or the
inability to hire and retain sufficient qualified personnel could have a
material adverse effect on the Company's business, financial condition and
results of operations. There can be no assurance that the Company will be able
to retain these employees. The Company currently does not maintain any key man
life insurance on the life of any of its key employees.
Control by Existing Shareholders. As of September 30, 1998, Fred S.L. Chan,
the Company's Chief Executive Officer and Chairman of the Board of Directors,
together with his spouse, Annie M.H. Chan, a director of the Company, and
certain trusts for the benefit of the Chan's children and certain charities
beneficially owned, in the aggregate, 37% of the Company's outstanding Common
Stock. As a result, these shareholders, acting together, possess significant
voting power over the Company, giving them the ability among other things to
influence significantly the election of the Company's Board of Directors and
approve significant corporate transactions. Such control could delay, defer or
prevent a change in control of the Company, impede a merger, consolidation,
takeover or other business combination involving the Company, or discourage a
potential acquirer from making a tender offer or otherwise attempting to obtain
control of the Company. Additionally, Fred S.L. Chan and Annie M.H. Chan
announced on April 28, 1998, that they would be purchasing between $5 and $10
million of the Company's common stock on the open market. As of September 30,
1998, such purchases had totaled $1.4 million representing 241,000 shares at
prices ranging from $5.15 to $6.56.
Possible Volatility of Stock Price. The price of the Company's Common Stock
has in the past and may continue in the future to fluctuate widely. Future
announcements concerning the Company, its competitors or its principal
customers, including quarterly operating results, changes in earnings estimates
by analysts, technological innovations, new product introductions, governmental
regulations or litigation may cause the market price of the Company's Common
Stock to continue to fluctuate substantially. Further, in recent years the stock
market has experienced extreme price and volume fluctuations that have
particularly affected the market prices of equity securities of many high
technology companies and that often have been unrelated or disproportionate to
the operating performance of such companies. These fluctuations, as well as
general economic, political and market conditions such as recessions or
international currency fluctuations, may materially adversely affect the market
price of the Common Stock.
Year 2000 Compliance. The dates on which the Company believes the Year 2000
Program (the "Y2K Program") will be completed are based on Management's best
estimates, which were derived utilizing numerous assumptions of future events,
including the continued availability of certain resources, third-party
modification plans and other factors. However, there can be no guarantee that
these estimates will be achieved, or that there will not be a delay in, or
increased costs associated with, the implementation of the Y2K Program. Specific
factors that might cause differences between the estimates and actual results
include, but are not limited to, the availability and cost of personnel trained
in these areas, the ability to locate and correct all relevant computer code,
timely responses to and corrections by third-parties and suppliers, the ability
to implement interfaces between the new systems and the systems not being
replaced, and similar uncertainties. Due to the general uncertainty inherent in
the Year 2000 problem, resulting in part from the uncertainty of the Year 2000
readiness of third-parties and the interconnection of global businesses, the
Company cannot ensure its ability to timely and cost-effectively resolve
problems associated with the Year 2000 issue that may affect its operations and
business, or expose it to third-party liability.
PART II
Item 1. Legal Proceedings
On March 11, 1998, Creative Technology Ltd. and its subsidiary E-mu Systems,
Inc. filed a lawsuit against the Company and one of its customers, Diamond
Multimedia Systems, Inc., alleging infringement of U.S. Patent No. 5,698,803
(the "803 patent"), by the Company's Maestro products, one of which is included
in products sold by Diamond. The complaint requests preliminary and permanent
injunctions, and unspecified damages. Creative also claims willful infringement
and requests treble damages and attorney's fees. The lawsuit, entitled Creative
Technology Ltd. et al v. ESS Technology, Inc. et al, is pending in the U.S.
District Court for the Central District of California.
On September 25, 1998, the lawsuit between the Company and Creative had been
settled to the parties' mutual satisfaction and ESS is now under a license from
Creative regarding sales of its Maestro products. Further terms of the
settlement are confidential.
<PAGE> 17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Shareholders of ESS Technology, Inc. was held on May
22, 1998 in Santa Clara, California. Of the total of 40,891,153 shares
outstanding as of the record date, 38,160,314 were present or represented by
proxies at the meeting. The table below presents the results of the election of
the Company's board of directors:
<TABLE>
<CAPTION>
Votes Votes
For Withheld
----- --------
<S> <C> <C>
Fred S.L. Chan 37,708,478 451,836
Annie M.H. Chan 37,673,837 486,477
Dominic Ng 37,751,098 409,216
Peter T. Mok 37,750,847 409,467
Ilbok Lee 37,750,547 409,767
</TABLE>
The shareholders approved and ratified 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. The proposal received 21,438,717 affirmative votes, 2,988,179
negative votes, 123,898 abstentions and 16,340,359 broker nonvotes.
The shareholders approved and ratified 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.
The proposal received 19,355,899 affirmative votes, 5,054,394 negative votes,
14,050 abstentions and 16,340,359 broker nonvotes.
The shareholders ratified the selection of PricewaterhouseCoopers LLP as
independent accountants for the Company for the fiscal year ending December 31,
1998. The proposal received 37,885,110affirmative votes, 164,459 negative votes,
110,745 abstentions and 2,730,839 broker nonvotes.
ITEM 5. OTHER INFORMATION
The Securities and Exchange Commission has recently amended Rule
14a-4(c)(1) promulgated under the Securities and Exchange Act of 1934. As
amended, Rule 14a-4(c)(1) provides that if a proponent fails to notify the
Company of a proposal at least 45 days prior to the month and day of mailing of
the prior year's proxy statement, then management would be allowed to use its
discretionary voting authority without any discussion of the matter in the
proxy statement when the proposal is raised at the Annual Meeting. The proxy
statement for the Company's 1998 Annual Meeting of Shareholders was mailed to
shareholders on April 28, 1998. Accordingly, if a proponent does not notify the
Company on or before March 14, 1999 of a proposal for the 1999 Annual Meeting
of Shareholders, management may use its discretionary voting authority to vote
on such proposal, even if the matter is not discussed in the proxy statement
for the 1999 Annual Meeting of Shareholders.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
10.32 -- Form of Resignation Agreement and Exhibits thereto between the
Registrant and John H. Barnet
10.33 -- Secured Revolving Promissory Note and Loan Agreements dated
September 23, 1998 between Registrant and Tokai Bank of
California.
27.01 -- Financial Data schedule
(b) Reports on Form 8-K. No reports were filed on Form 8-K for the quarter
ended September 30, 1998.
<PAGE> 18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this amendment to report on Form 10-Q to be signed on
its behalf by the undersigned, thereunto duly authorized.
ESS TECHNOLOGY, INC.
(Registrant)
Date: November 16, 1998 By: /s/ FRED S.L. CHAN
---------------------------------
Fred S.L. Chan
President, Chief Executive Officer
and Chairman of the Board
Date: November 16, 1998 By: /s/ DALE R. LINDLY
---------------------------------
Dale R. Lindly
Vice President of Finance, Chief
Financial Officer and Secretary
Date: November 16, 1998 By: /s/ HOWARD N. HIDESHIMA
---------------------------------
Howard N. Hideshima
Controller and Chief
Accounting Officer
<PAGE> 19
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
10.32 Form of Resignation Agreement
10.33 Secured Revolving Promissory Note and Loan Agreements
27.01 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 10.32
ESS TECHNOLOGY, INC.
RESIGNATION AGREEMENT
This Resignation Agreement ("AGREEMENT") is made as of August 6, 1998, by
and between ESS Technology, Inc. (the "COMPANY"), and John H. Barnet (the
"EMPLOYEE").
WHEREAS, the Employee wishes to resign from his position as Vice-President
of Finance and Administration, Chief Financial Officer and Secretary of the
Company; and
WHEREAS, the Company wishes to accept Employee's resignation.
NOW, THEREFORE, in consideration of the mutual promises made herein, the
Company and Employee (collectively referred to as the "PARTIES") hereby agree as
follows:
1. RESIGNATION. The Company and Employee acknowledge and agree that
Employee's resignation as Vice-President of Finance and Administration, Chief
Financial Officer and Secretary (the "RESIGNATION") shall be effective as of the
close of business on August 31, 1998 (the "RESIGNATION DATE").
2. MUTUAL RELEASE OF CLAIMS. Effective as of the Resignation Date, the
Company and the Employee shall enter into a Resignation Agreement and Mutual
Release (the "Release")in the form attached hereto as Exhibit B.
3. CONSULTING AGREEMENT. Effective as of the Resignation Date, the Company
and the Employee shall enter into a Consulting Agreement (the "CONSULTING
AGREEMENT") in the form attached hereto as Exhibit A. to the Release.
4. CONFIDENTIALITY. The Company and the Employee each agree to use their
best efforts to maintain in confidence the existence of this Agreement and the
contents and terms of this Agreement, except as required by law.
5. SEVERABILITY. In the event that any provision hereof becomes or is
declared by a court or other tribunal of competent jurisdiction to be illegal,
unenforceable or void, this Agreement shall continue in full force and effect
without said provision.
7. GOVERNING LAW. This Agreement shall be governed by the laws of the State
of California, without regard to its conflicts of law provisions.
8. COUNTERPARTS. This Agreement may be executed in counterparts, and each
counterpart shall have the same force and effect as an original and shall
constitute an effective, binding agreement on the part of each of the
undersigned.
9. PRESS RELEASE. Employee hereby consents to the Company's announcement of
the press release attached hereto.
[Signature Page Follows]
<PAGE> 2
IN WITNESS WHEREOF, the Parties have executed this Agreement and Mutual
Release on the respective dates set forth below.
ESS TECHNOLOGY, INC.
Dated as of August 6, 1998 By: /s/ FRED S.L. CHAN
--------------------------------------
Title: Chairman of the Board of Directors
----------------------------------
JOHN H. BARNET, an individual
Dated as of August 6, 1998 By: /s/ JOHN H. BARNET
--------------------------------------
John H. Barnet
-2-
<PAGE> 3
EXHIBIT A
CONSULTING AGREEMENT
<PAGE> 4
ESS TECHNOLOGY, INC.
CONSULTING AGREEMENT
Mr. John H. Barnet
c/o ESS Technology, Inc.
48401 Fremont Blvd.
Fremont, CA 94538
Dear Mr. Barnet:
1. ESS Technology, Inc., a California corporation (the "Company") wishes to
obtain your services as a consultant on specified projects consistent with your
prior duties as an employee of the Company as directed by the Company for a
minimum of 87 hours per month until December 31, 1998, and thereafter on an as
needed basis upon the mutual agreement of you and the Company. This letter shall
constitute an agreement ("Agreement") between you and the Company with respect
to the services you are to provide.
2. This Agreement shall become effective on the date hereof and remain in
effect until the earlier of December 31, 1998, the date on which you commence
full-time employment with another entity, or such time as it may be terminated
for Cause. Either party may terminate this Agreement for Cause at any time. For
this purpose, Cause means the other party's material or intentional breach of
such other party's obligations under this Agreement or the Agreement and Mutual
Release between you and the Company dated as of August 31, 1998 (the
"Resignation Agreement").
3. The Company shall pay you at the rate of $25,000 per month for
consulting services of up to 87 hours per month and an additional $287.35 per
hour for each additional hour more than 87 hours per month worked by you,
payable bi-weekly within 15 days after receipt of your invoice for hours worked
during the prior period, for projects as agreed to by the Company and you.
4. Your relationship with the Company shall be that of an independent
contractor and not that of an employee. You will not be eligible for any
employee benefits, nor will the Company make deductions from payments made to
you for taxes, which shall be your responsibility (unless such deductions are
required by relevant taxing authorities). You agree to indemnify and hold the
Company harmless from any claims, demands, deficiencies, penalties, assessments,
executions, judgments, or recoveries by any government agency against the
Company for any amounts claimed due on account of your failure to pay federal or
state taxes or damages sustained by the Company by reason of any such claims,
including reasonable attorneys' fees. You shall have no authority to enter into
contracts which bind the Company or create obligations on the part of the
Company without the express prior authorization of the Chairman of the Board of
Directors of the Company (the "Chairman").
<PAGE> 5
5. All services to be performed by you will be as agreed between you and
the Chairman. You shall be required to report to the Chairman concerning your
services performed under this Agreement, or such other party designated by the
Chairman.
6. You understand and agree that the terms of your existing Confidentiality
Agreement (the "Confidentiality Agreement") shall remain in full force and
effect as provided in such agreement, notwithstanding any termination of this
Agreement. In that regard, you shall keep in confidence and shall not disclose
or make available to third parties or make any use of any information or
documents relating to your services under this Agreement or to the products,
methods of manufacture, trade secrets, processes, business or affairs or
confidential or proprietary information of the Company (other than information
in the public domain through no fault of your own), except with the prior
written consent of the Company or to the extent necessary in performing tasks
assigned to you by the Company. No later than September 30, 1998, you will
return to Company all documents and other materials related to the services
provided hereunder or furnished to you by the Company. Your obligations under
this Paragraph 6 shall survive termination of this Agreement for any reason.
7. Any amendment to this Agreement must be in writing signed by you and the
Company.
8. All notices, requests and other communications called for by this
Agreement shall be deemed to have been given if made in writing and mailed,
postage prepaid, if to you at the address set forth above and if to the Company
at 48401 Fremont Blvd., Fremont, CA 94538, or to such other addresses as either
party shall specify to the other.
9. The validity, performance and construction of this Agreement shall be
governed by the laws of the State of California without regard to its conflict
of laws provisions.
10. This Agreement supersedes any prior consulting or other similar
agreements between you and the Company other than the Resignation Agreement and
the Confidentiality Agreement.
<PAGE> 6
If this Agreement is satisfactory, you should execute and return the
original and one copy to us, retaining the third copy for your file.
Dated as of: August 31, 1998
Very truly yours, ESS
TECHNOLOGY, INC.
By: /S/ FRED S.L. CHAN
---------------------------------------
Title: Chairman of the Board of Directors
AGREED AND ACCEPTED:
/s/ JOHN H. BARNET
- --------------------------------
John H. Barnet
<PAGE> 7
EXHIBIT B
RESIGNATION AGREEMENT AND MUTUAL RELEASE
<PAGE> 8
ESS TECHNOLOGY, INC.
RESIGNATION AGREEMENT AND MUTUAL RELEASE
This Resignation Agreement and Mutual Release ("AGREEMENT") is made by and
between ESS Technology, Inc. (the "COMPANY"), and John H. Barnet (the
"EMPLOYEE").
WHEREAS, the Employee wishes to resign from his position as Vice-President
of Finance and Administration, Chief Financial Officer and Secretary of the
Company; and
WHEREAS, the Company and Employee have mutually agreed to release each
other from any claims arising from or related to the employment relationship and
to enter into a consulting arrangement pursuant to which Employee will perform
consulting services for the Company as described below.
NOW, THEREFORE, in consideration of the mutual promises made herein, the
Company and Employee (collectively referred to as the "PARTIES") hereby agree as
follows:
1. RESIGNATION. The Company and Employee acknowledge and agree that
Employee's resignation as Vice-President of Finance and Administration, Chief
Financial Officer and Secretary and resignation from the Company (the
"RESIGNATION") shall be effective at the close of business on August 31, 1998
(the "RESIGNATION DATE").
2. CONSULTING AGREEMENT. Effective as of the Resignation Date, the
Company and the Employee shall enter into a consulting agreement (the
"CONSULTING ARRANGEMENT") in substantially the form attached hereto as Exhibit A
(the "CONSULTING AGREEMENT").
3. CONSIDERATION. Shortly after the Resignation Date, the Company will
pay Employee his pro rated portion of bonuses that he has earned through the
Resignation Date pursuant to the Company's executive bonus program, but in no
event less than $40,000. After the Resignation Date and until the termination of
the Consulting Agreement, the Company shall pay Employee for consulting services
as set forth in the Consulting Agreement.
4. BENEFITS.
(a) Following the Resignation Date, Employee shall have the right to
continue, at his own expense, coverage under the Company's medical insurance
program as provided by the Consolidated Omnibus Budget Reconciliation Act of
1985, as amended ("COBRA"), for the period required by COBRA.
(b) Except as set forth in this Section 4 and as required by
applicable law, Employee shall not be entitled to participate in any benefit
plans or programs provided to employees of the Company following the Resignation
Date.
5. NO OTHER PAYMENTS DUE. The Company agrees that it will pay to Employee
on the Resignation Date all salary, accrued vacation, commissions, compensation,
shares of stock or options therefore and/or such other sums as may then be due
to Employee other than benefits to be paid in accordance with the provisions of
this Agreement. Employee will execute an
<PAGE> 9
acknowledgment of receipt of all such payments as received and an acknowledgment
that, in light of the payment by the Company of all wages due, or to become due
to Employee, California Labor Code Section 206.5 is not applicable to the
Parties hereto. That section provides in pertinent part as follows:
No employer shall require the execution of any release of
any claim or right on account of wages due, or to become
due, or made as an advance on wages to be earned, unless
payment of such wages has been made.
6. RELEASE OF CLAIMS. Employee agrees that the foregoing consideration
represents settlement in full of all outstanding obligations owed to Employee by
the Company. Employee and the Company, on behalf of themselves, and their
respective heirs, executors, officers, directors, employees, shareholders,
administrators, affiliates, divisions, subsidiaries, predecessor and successor
corporations, and assigns, hereby fully and forever release each other and their
respective heirs, executors, officers, directors, employees, shareholders,
administrators, affiliates, divisions, subsidiaries, predecessor and successor
corporations, and assigns, of and from any claim, duty, obligation or cause of
action relating to any matters of any kind, whether presently known or unknown,
suspected or unsuspected, that any of them may possess arising from any
omissions, acts or facts that have occurred up until and including the Effective
Date, as defined below, of this Agreement including, without limitation:
(a) any and all claims relating to or arising from Employee's
employment relationship with the Company and the termination of that
relationship;
(b) any and all claims for wrongful discharge of employment; breach
of contract, both express and implied; breach of a covenant of good faith and
fair dealing, both express and implied, negligent or intentional infliction of
emotional distress; negligent or intentional misrepresentation; negligent or
intentional interference with contract or prospective economic advantage;
negligence; and defamation;
(c) any and all claims for violation of any federal, state or
municipal statute, including, but not limited to, Title VII of the Civil Rights
Act of 1964, the Civil Rights Act of 1991, the Age Discrimination in Employment
Act of 1967, the Americans with Disabilities Act of 1990, and the California
Fair Employment and Housing Act;
(d) any and all claims arising out of any other laws and regulations
relating to employment or employment discrimination;
(e) any and all claims for attorneys' fees and costs; and
(f) any and all claims relating to the granting of options and the
purchase of the Common Stock of the Company under the Company's 1995 Stock
Option Plan and 1997 Equity Incentive Plan.
The Company and Employee agree that the release set forth in this
Section 6 shall be and remain in effect in all respects as a complete general
release as to the matters released and that this release does not extend to any
obligations incurred under this Agreement.
-2-
<PAGE> 10
7. ACKNOWLEDGMENT OF WAIVER OF CLAIMS UNDER ADEA. Employee acknowledges
that he is waiving and releasing any rights he may have under the Age
Discrimination in Employment Act of 1967 ("ADEA") and that this waiver and
release is knowing and voluntary. Employee and the Company agree that this
waiver and release does not apply to any rights or claims that may arise under
ADEA after the Effective Date of this Agreement. Employee acknowledges that the
consideration given for this waiver and release Agreement is in addition to
anything of value to which Employee was already entitled. Employee further
acknowledges that he has been advised by this writing that (a) he should consult
with an attorney prior to executing this Agreement; (b) he has at least
twenty-one (21) days within which to consider this Agreement; (c) he has at
least seven (7) days following the execution of this Agreement by the Parties to
revoke the Agreement (the "REVOCATION PERIOD"); and (d) this Agreement shall not
be effective until the Revocation Period has expired.
8. CIVIL CODE SECTION 1542. The Parties represent that they are not aware
of any claim by either of them other than the claims that are released by this
Agreement. Employee and the Company acknowledge that they have been advised by
legal counsel and are familiar with the provisions of California Civil Code
Section 1542, which provides as follows:
A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT
KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE,
WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE
DEBTOR.
Employee and the Company, being aware of said Code section, agree to
expressly waive any rights they may have thereunder, as well as under any other
statute or common law principles of similar effect.
9. INDEMNIFICATION AGREEMENT. Notwithstanding the releases set forth in
Sections 6, 7 and 8 of this Agreement, the Company and the Employee agree that
the Employee shall continue to be indemnified to the fullest extent permitted by
the California Corporations Code, as provided for by Section 6.1 of the
Company's By-Laws and the Company and employee shall continue to be subject to
the terms of the Indemnification Agreement executed by the Company and Employee
on August 6, 1998 (the "Indemnification Agreement"), a copy of which is attached
hereto as Exhibit B.
10. CONFIDENTIALITY. The Parties hereto each agree to use their best
efforts to maintain in confidence the existence of this Agreement, the contents
and terms of this Agreement, and the consideration for this Agreement
(hereinafter collectively referred to as "RESIGNATION INFORMATION"), except as
required by law. Each Party hereto agrees to take every reasonable precaution to
prevent disclosure of any Resignation Information to third parties, and each
agrees that there will be no publicity, directly or indirectly, concerning any
Resignation Information. The Parties hereto agree to take every precaution to
disclose Resignation Information only to those employees, officers, directors,
attorneys, accountants, governmental entities, and family members who have a
reasonable need to know of such Resignation Information.
-3-
<PAGE> 11
11. NONDISCLOSURE OF CONFIDENTIAL AND PROPRIETARY INFORMATION. Employee
understands and agrees that his obligations to the Company under his existing
Confidentiality Agreement between the Employee and the Company (the
"CONFIDENTIALITY AGREEMENT"), a copy of which is attached hereto as Exhibit C,
shall survive termination of his relationship with the Company under this
Agreement and that Employee shall continue to maintain the confidentiality of
all confidential and proprietary information of the Company as provided by the
Confidentiality Agreement. Employee agrees that at all times hereafter, Employee
shall not intentionally divulge, furnish or make available to any party any of
the trade secrets, patents, patent applications, price decisions or
determinations, inventions, customers, proprietary information or other
intellectual property of the Company, until after such time as such information
has become publicly known otherwise than by act of collusion of Employee.
Employee further agrees that he will return all the Company's property and
confidential and proprietary information in his possession to the Company no
later than September 30, 1998, unless otherwise agreed to in writing by the
Parties.
12. NONCOMPETITION AND NONSOLICITATION. Employee agrees that until the
termination of the Consulting Agremeent, Employee shall not, without the prior
written consent of the Company, which shall not be unreasonably withheld, at any
time during the term of this Agreement and the Consulting Agreement, directly or
indirectly, whether or not for compensation, (a) engage in, or have any interest
in any person, firm, corporation or business (whether as an employee, officer,
director, agent, security holder, creditor, consultant, partner or otherwise)
that engages in any activity involving the design, marketing or support of
highly integrated mixed signal semiconductor and software solutions for
multimedia applications in the personal computer and consumer marketplaces, (b)
divert or attempt to divert from the Company, or any affiliated company, any
business of a kind involving the professional specialties or product lines
indicated in clause (a) above, or (c) induce or attempt to induce any person who
is an employee of the Company, or any affiliated company, to leave the Company,
or any affiliated company, to become an employee of any person, firm,
corporation or business described in clause (a) above; provided, however, that
Employee may own up to 1% of the securities of any company whose securities are
publicly traded that is of a sort described in clause (a) above.
The Parties intend that the covenant contained in the preceding paragraph
shall be construed as a series of separate covenants, one for each county or
other geographic or political subdivision of each jurisdiction in which the
Company conducts business. If, in any judicial proceeding, a court shall refuse
to enforce any of the separate covenants deemed included in this paragraph, then
the unenforceable covenant shall be deemed eliminated from the provisions for
the purpose of those proceedings to the extent necessary to permit the remaining
separate covenants to be enforced.
13. BREACH OF THIS AGREEMENT. Employee acknowledges that upon breach of
the Confidentiality, Nondisclosure of Confidential and Proprietary Information
and the Noncompetition and Nonsolicitation provisions contained in Sections 10,
11 and 12 of this Agreement, the Company would sustain irreparable harm from
such breach, and, therefore, Employee agrees that in addition to any other
remedies which the Company may have under this Agreement or otherwise, the
Company shall be entitled to obtain equitable relief, including specific
performance and injunctions, restraining Employee from committing or continuing
any such violation of this Agreement. Employee acknowledges and agrees that upon
Employee's
-4-
<PAGE> 12
material or intentional breach of any of the provisions of this Agreement
(including Sections 10, 11 and 12) and following written notice of such breach
by the Company to Employee and an opportunity to cure such breach within five
(5) business days where such breach may be cured, in addition to any other
remedies the Company may have under this Agreement or otherwise, the Company's
obligations to provide consulting payments and benefits to Employee as described
in Sections 3 and 4 of this Agreement (subject to Employee's rights to continue
health insurance coverage at his expense under COBRA as provided in Section 4)
and to continue the Consulting Arrangement with Employee shall immediately
terminate.
14. NON-DISPARAGEMENT. Each Party agrees to refrain from any
disparagement, criticism, defamation, slander of the other, or tortious
interference with the contracts and relationships of the other.
15. AUTHORITY. The Company represents and warrants that the individual
signing this Agreement on behalf of the Company has the authority to act on
behalf of the Company and to bind the Company and all who may claim through it
to the terms and conditions of this Agreement. Employee represents and warrants
that he has the capacity to act on his own behalf and on behalf of all who might
claim through him to bind them to the terms and conditions of this Agreement.
Each Party warrants and represents that there are no liens or claims of lien or
assignments in law or equity or otherwise of or against any of the claims or
causes of action released herein.
16. NO REPRESENTATIONS. Neither Party has relied upon any representations
or statements made by the other Party hereto which are not specifically set
forth in this Agreement.
17. SEVERABILITY. In the event that any provision hereof becomes or is
declared by a court or other tribunal of competent jurisdiction to be illegal,
unenforceable or void, this Agreement shall continue in full force and effect
without said provision.
18. ARBITRATION. The Parties shall attempt to settle all disputes arising
in connection with this Agreement (or any of the exhibits hereto, except the
Confidentiality Agreement) through good faith consultation. In the event no
agreement can be reached on such dispute within fifteen (15) days after
notification in writing by either Party to the other concerning such dispute,
the dispute shall be settled by binding arbitration to be conducted in Santa
Clara, California in accordance with the then prevailing rules of the American
Arbitration Association. The arbitration decision shall be final, conclusive and
binding on both Parties and any arbitration award or decision may be entered in
any court having jurisdiction. The prevailing Party in any such proceeding shall
be entitled to recover its costs and expenses and attorneys' fees from the other
Party. THE PARTIES HEREBY WAIVE ANY RIGHTS THEY MAY HAVE TO TRIAL BY JURY IN
REGARD TO ARBITRABLE CLAIMS.
19. ENTIRE AGREEMENT. Except for obligations which continue after
termination of Employee's employment relationship with the Company pursuant to
the Confidentiality Agreement and the Indemnification Agreement, this Agreement,
and the exhibits thereto, represent the entire agreement and understanding
between the Company and Employee concerning Employee's separation from the
Company, and supersede and replace any and all
-5-
<PAGE> 13
prior agreements and understandings concerning Employee's relationship with the
Company and his compensation by the Company.
20. NO ORAL MODIFICATION. This Agreement may only be amended in writing
signed by Employee and the Company.
21. GOVERNING LAW. This Agreement shall be governed by the laws of the
State of California, without regard to its conflicts of law provisions.
22. EFFECTIVE DATE. This Agreement is effective upon the expiration of the
Revocation Period described in Section 8 and such date is referred to herein as
the "EFFECTIVE DATE."
23. COUNTERPARTS. This Agreement may be executed in counterparts, and each
counterpart shall have the same force and effect as an original and shall
constitute an effective, binding agreement on the part of each of the
undersigned.
24. ASSIGNMENT. This Agreement may not be assigned by Employee or the
Company without the prior written consent of the other party. Notwithstanding
the foregoing, this Agreement may be assigned by the Company to a corporation
controlling, controlled by or under common control with the Company without the
consent of Employee.
25. PRESS RELEASE. Employee hereby consents to the Company's announcement
of the press release attached hereto.
26. VOLUNTARY EXECUTION OF AGREEMENT. THIS AGREEMENT IS EXECUTED
VOLUNTARILY AND WITHOUT ANY DURESS OR UNDUE INFLUENCE ON THE PART OR BEHALF OF
THE PARTIES HERETO, WITH THE FULL INTENT OF RELEASING ALL CLAIMS. THE PARTIES
ACKNOWLEDGE THAT:
(A) THEY HAVE READ THIS AGREEMENT;
(B) THEY HAVE BEEN REPRESENTED IN THE PREPARATION, NEGOTIATION, AND
EXECUTION OF THIS AGREEMENT BY LEGAL COUNSEL OF THEIR OWN CHOICE OR THAT THEY
HAVE VOLUNTARILY DECLINED TO SEEK SUCH COUNSEL;
(C) THEY UNDERSTAND THE TERMS AND CONSEQUENCES OF THIS AGREEMENT AND
OF THE RELEASES IT CONTAINS; AND
(D) THEY ARE FULLY AWARE OF THE LEGAL AND BINDING EFFECT OF THIS
AGREEMENT.
[Signature Page Follows]
-6-
<PAGE> 14
IN WITNESS WHEREOF, the Parties have executed this Agreement and Mutual
Release on the respective dates set forth below.
ESS TECHNOLOGY, INC.
Dated as of August 31, 1998 By: /s/ FRED S.L. CHAN
--------------------------------------
Title: Chairman of the Board of Directors
-----------------------------------
JOHN H. BARNET, an individual
Dated as of August 31, 1998 /s/ JOHN H. BARNET
-----------------------------------------
John H. Barnet
-7-
<PAGE> 15
EXHIBIT A
CONSULTING AGREEMENT
[SEE EXHIBIT A OF THE "RESIGNATION AGREEMENT"]
<PAGE> 16
EXHIBIT B
INDEMNIFICATION AGREEMENT
<PAGE> 17
ESS TECHNOLOGY, INC.
INDEMNITY AGREEMENT
THIS INDEMNITY AGREEMENT (this "Agreement") is entered into, effective
as of August 6, 1998, between ESS Technology, Inc., a California corporation
(the "Company"), and John H. Barnet ("Indemnitee").
WHEREAS, it is essential to the Company to retain and attract as
directors, officers and other agents the most capable persons available; and
WHEREAS, Indemnitee is a director and/or other agent of the Company,
and both the Company and Indemnitee recognize the increased risk of litigation
and other claims currently being asserted against such person; and
WHEREAS, in recognition of Indemnitee's need for substantial protection
against personal liability and in order to enhance Indemnitee's continued and
effective service to the Company, the Company desires to provide for the
indemnification of, and the advancing of expenses to, Indemnitee to the fullest
extent permitted by law and as set forth in this Agreement;
NOW, THEREFORE, in consideration of the above premises and the promises
set forth herein, the parties hereto agree as follows:
1. CERTAIN DEFINITIONS. As used in this Agreement, the capitalized
terms listed below shall have the meanings ascribed to them as follows:
1.1 Board. The Board of Directors of the Company.
1.2 Expenses. Any expense, liability, or loss, including
attorneys' fees, judgments, fines, ERISA excise taxes and penalties, amounts
paid or to be paid in settlement, any interest, assessments, or other charges
imposed thereon, and any federal, state, local, or foreign taxes imposed as a
result of the actual or deemed receipt of any payments under this Agreement,
paid or incurred in connection with investigating, defending, being a witness
in, or participating in (including on appeal), or preparing for any of the
foregoing in, any Proceeding relating to any Indemnifiable Event.
1.3 Indemnifiable Event. Any event or occurrence that takes
place either prior to or after the execution of this Agreement, related to the
fact that Indemnitee:
(a) is or was a director, an officer or other agent of
the Company; or
(b) while a director, officer or other agent of the
Company is or was serving at the request of the Company as a director, officer,
employee, trustee, agent, or fiduciary of another foreign or domestic
corporation, partnership, joint venture, employee benefit plan, trust, or other
enterprise; or
<PAGE> 18
(c) was a director, officer, employee or other agent of
a foreign or domestic corporation that was a predecessor corporation of the
Company or was a director, officer, employee, trustee, agent, or fiduciary of
another enterprise at the request of such predecessor corporation; and related
to anything done or not done by Indemnitee in any such capacity, whether or not
the basis of the Proceeding is alleged action in an official capacity while
serving as described in clauses (a) through (c) above.
1.4 Proceeding. Any threatened, pending, or completed action,
suit, or proceeding, or any inquiry, hearing, or investigation, whether
conducted by the Company or any other party, that Indemnitee in good faith
believes might lead to the institution of any such action, suit, or proceeding,
whether civil, criminal, administrative, investigative or other.
2. AGREEMENT TO INDEMNIFY. In the event Indemnitee was, is, or becomes
a party to, or witness or other participant in, or is threatened to be made a
party to, or witness or other participant in, a Proceeding by reason of (or
arising in part out of) an Indemnifiable Event, the Company shall indemnify
Indemnitee from and against any and all Expenses to the fullest extent
permitted by law, as the same exists or may hereafter be amended or interpreted
(but in the case of any such amendment or interpretation, only to the extent
that such amendment or interpretation permits the Company to provide broader
indemnification rights than were permitted prior thereto). The rights to
receive indemnification and the advancement of Expenses under this Agreement
are not exclusive of any other rights which Indemnitee may be entitled or
subsequently entitled under any statute, the Company's Articles of Incorporation
or Bylaws, by vote of the shareholders or the Board, or otherwise. To the
extent that a change in applicable law (whether by statute or judicial
decision) or the Bylaws permits greater indemnification than is currently
provided for an Indemnifiable Event, Indemnitee shall be entitled to such
greater indemnification under this Agreement.
2.1 Partial Indemnification. If Indemnitee is entitled under
any provision of this Agreement to indemnification by the Company for a portion
of Expenses, but not, however, for the total amount thereof, the Company shall
nevertheless indemnify Indemnitee for the portion of such Expenses to which
Indemnitee is entitled.
2.2 Prohibited Indemnification. Subject only to Section 2.3
below, no indemnification nor Expense Advance (as defined in Section 3.1 below)
pursuant to this Agreement shall be paid by the Company:
(a) In connection with any Proceeding initiated by
Indemnitee against the Company or any director of officer of the Company unless
the Company has joined in, or the Board has consented to, the initiation of
such Proceeding, or the Proceeding is one to enforce indemnification rights
under Section 5 below;
(b) To the extent Indemnitee settles or otherwise
disposes of a Proceeding or causes the settlement or disposal of a Proceeding
without the Company's express prior written consent (which shall not be
unreasonably withheld) unless Indemnitee receives court approval for
- 2 -
<PAGE> 19
such settlement or other disposition where the Company had the opportunity to
oppose Indemnitee's request for such court approval;
(c) With regard to any judicial award if the Company was
not given a reasonable and timely opportunity, at its expense, to participate
in the defense of such action unless the Company's participation in such
Proceeding was barred by this Agreement or the court in such Proceeding; or
(d) For any acts, omissions, transactions or circumstances
for which indemnification is prohibited by applicable state or federal law or
until any preconditions imposed upon, or agreed to by, the Company by or with
any court or governmental agency are satisfied.
2.3 Mandatory Indemnification. Notwithstanding any other
provision of this Agreement, to the extent that Indemnitee has been successful
on the merits (within the meaning of Section 317(d) of the California
Corporations Code) in defense of any Proceeding relating in whole or in part
to an Indemnifiable Event or in defense of any issue or matter therein,
Indemnitee shall be indemnified against all Expenses incurred in connection
therewith.
3. EXPENSE ADVANCES.
3.1 Advance of Expenses to Indemnitee. Expenses incurred by
Indemnitee in any Proceeding for which indemnification may be sought under this
Agreement shall be advanced by the Company to Indemnitee within 20 days after
receipt by the Company of a statement or statements from Indemnitee requesting
such advance and reasonably evidencing the Expenses incurred by Indemnitee (an
"Expense Advance"). If it is ultimately determined by a final judicial decision
(from which there is no right of appeal) that Indemnitee is not entitled to be
indemnified by the Company, Indemnitee hereby agrees to repay any amounts
advanced by the Company under this Section 3. Indemnitee agrees to execute any
further agreements regarding the repayment of Expenses as the Company may
reasonably request prior to receiving any such advance.
4. NOTIFICATION AND DEFENSE OF PROCEEDING.
4.1 Notice of Claim. Indemnitee shall give written notice to the
Company promptly after Indemnitee has actual knowledge of any Proceeding as to
which indemnification may be sought under this Agreement. The failure of
Indemnitee to give notice, as provided in this Section 4.1, shall not relieve
the Company of its obligations to provide indemnification under this Agreement;
however, the amounts to which Indemnitee may be indemnified shall be reduced to
the extent that the Company has been prejudiced by such failure.
4.2 Defense. With respect to any Proceeding, the Company will be
entitled to participate in the Proceeding at its own expense and, except as
otherwise provided below, to the extent the Company so desires, the Company may
assume the defense thereof with counsel reasonably satisfactory to Indemnitee.
However, the Company shall not be entitled to assume the defense of any
Proceeding (a) brought by the Company, or (b) as to which Indemnitee has rea-
- 3 -
<PAGE> 20
sonably determined that there may be a conflict of interest between Indemnitee
and the Company in the defense of he Proceeding and Indemnitee does in fact
assume and conduct the defense.
4.2.1 If the Company assumes the defense, Indemnitee shall
furnish such information regarding Indemnitee or the Proceeding in question, as
the Company may reasonably request and as may be required in connection with
the defense or settlement of such Proceeding and shall fully cooperate with the
Company in every other respect. Except as provided in Section 4.3 below, if the
Company assumes the defense of the Proceeding, the Company shall take all
necessary steps in good faith to defend, settle or otherwise dispose of the
Proceeding.
4.2.2 After notice from the Company to Indemnitee of its
election to assume the defense of any Proceeding, the Company will not be
liable to Indemnitee under this Agreement or otherwise for any Expenses in
excess of $10,000 subsequently incurred by Indemnitee in connection with
the defense of such Proceeding other than reasonable costs of investigation or
as otherwise provided in clauses (a) through (c) below. Indemnitee shall have
the right to employ Indemnitee's own counsel in such Proceeding, but all
Expenses related thereto incurred after notice from the Company of its
assumption of the defense shall be at Indemnitee's expense, unless: (a) the
employment of counsel by Indemnitee has been authorized by the Company;
(b) Indemnitee has reasonably determined that there may be a conflict of
interest between Indemnitee and the Company in the defense of the Proceeding,
but Indemnitee does not, in fact, assume and conduct the defense; or (c) the
Company has not, in fact, assume and conduct the defense of such Proceeding.
4.2.3 Any Expenses incurred by the Company in defense of the
Proceeding under this Section 4.2 (except in a situation described in clause
(a), (b) or (c) of Section 4.2.2) shall be considered Expenses advanced by the
Company to Indemnitee under Section 3 above.
4.3 Limitation on the Company's Disposition of any Proceeding. The
Company may consent to a settlement or other disposition of all or any part of
any Proceeding which the Company is defending under Section 4.2 above without
first obtaining the written consent of Indemnitee, provided that such
settlement or other disposition would not cause Indemnitee to materially lose
any right to indemnification under this Agreement.
5. ENFORCEMENT. The Company expressly confirms and agrees that it has
entered into this Agreement and assumed the obligations imposed on it hereby in
order to induce Indemnitee to continue as a director, officer or other agent of
the Company, and acknowledges that Indemnitee is relying upon this Agreement in
continuing in such capacity. Indemnitee shall have the right to enforce his
indemnification rights under this Agreement by commencing litigation in any
court in the State of California having subject matter jurisdiction thereof and
in which venue is proper. Likewise, the Company may seek judicial determination
of its obligations under this Agreement. The Company and Indemnitee each hereby
consent to service of process and to appear in any such proceeding.
5.1 Defenses: Burden of Proof. It shall be a defense to any action
brought by Indemnitee or the Company concerning enforceability of this
Agreement that is not permissible
-4-
<PAGE> 21
under applicable law for the Company to indemnify Indemnitee for the amount
claimed. In connection with any such action or any determination as to whether
Indemnitee is entitled to be indemnified hereunder, the burden of proof shall
be on the Company.
5.2 Presumptions. Neither the failure of the Company (including its
Board or shareholders) to have made a determination prior to the commencement
of such action that indemnification is proper under the circumstances because
Indemnitee has met the standard of conduct set forth in applicable law, nor an
actual determination by the Company (including its Board or shareholders) that
Indemnitee has not met such applicable standard of conduct, shall be a defense
to the action or create a presumption that Indemnitee has not met the
applicable standard of conduct. For purposes of this Agreement, the termination
of any claim, action, suit or proceeding, by judgment, order, settlement
(whether with or without court approval), conviction, or upon a plea of nolo
contendere, or its equivalent, shall not create a presumption that Indemnitee
did not meet any particular standard of conduct or have any particular belief
or that a court has determined that indemnification is not permitted by
applicable law.
5.3 Equitable Relief. The Company agrees that the Company's failure
to make indemnification payments or Expense Advances to Indemnitee shall cause
irreparable damage to Indemnitee, the exact amount of which is impossible to
ascertain, and for this reason agrees that Indemnitee shall be entitled to such
injunctive or other equitable relief as shall be necessary to adequately
provide for payment or reasonably anticipated payments.
5.4 Indemnification for Expenses Incurred in Enforcing Rights. The
Company shall indemnify Indemnitee against any and all Expenses and, if
requested by Indemnitee, shall (within twenty days after such request), advance
such Expenses to Indemnitee, that are incurred by Indemnitee in connection with
any claim or action asserted against or brought by Indemnitee for
indemnification of Expenses or payment of Expense Advances by the Company under
this Agreement or any other agreement or under applicable law or the Company's
Articles of Incorporation or Bylaws now or hereafter in effect relating to
indemnification for Indemnifiable Events. Any Expenses so paid shall be
considered Expense Advances under Section 3 above.
6. INSURANCE; SUBROGATION. The Company shall not be liable under this
Agreement to make any payment in connection with any claim made against
Indemnitee to the extent Indemnitee has otherwise received payment (under any
insurance policy, Bylaw, or otherwise) of the amounts otherwise indemnifiable
hereunder. In the event of payment under this Agreement, the Company shall be
subrogated to the extent of such payment to all of the rights of recovery of
Indemnitee, who shall execute all papers required and shall do everything that
may be necessary to secure such rights, including the execution of such
documents necessary to enable the Company effectively to bring suit to enforce
such rights.
7. GENERAL PROVISIONS.
7.1 Amendment of this Agreement. No supplement, modification, or
amendment of this Agreement shall be binding unless executed in writing by both
parties hereto. No waiver of any of the provisions of this Agreement shall
operate as a waiver of any other provisions hereof (whether or not similar),
nor shall such waiver constitute a continuing waiver.
- 5 -
<PAGE> 22
Except as specifically provided herein, no failure to exercise or any delay in
exercising any right or remedy hereunder shall constitute a waiver thereof.
7.2 Binding Effect. This Agreement shall be binding upon and inure
to the benefit of and be enforceable by the parties hereto and their respective
successors, assigns, spouses, heirs, and personal and legal representatives.
The indemnification provided under this Agreement shall continue as to
Indemnitee for any action taken or not taken while serving in an indemnified
capacity pertaining to an Indemnifiable Event even though Indemnitee may have
ceased to serve in such capacity at the time of any Proceeding.
7.3 Entire Agreement. This Agreement constitutes the entire
agreement between the parties hereto with respect to the subject matter hereof.
7.4 Remedies Cumulative. The rights and remedies provided in this
Agreement and by law shall be cumulative and the exercise of any particular
right or remedy shall not preclude the exercise of any other right or remedy in
addition to, or as an alternative to, such right or remedy.
7.5 Notices. Any notice required or permitted by this Agreement
shall be given in writing and shall be deemed effectively given upon personal
delivery or, if mailed, upon deposit with the United States Post Office by
certified mail, return receipt requested, postage prepaid, to the address for
the recipient set forth on the signature page hereto or to such other address as
the recipient shall hereafter have noticed the sending party in the manner
set forth above.
7.6 Headings. Descriptive headings contained herein are for
convenience of reference only and shall not affect the meaning or
interpretation of this Agreement.
7.7 References. Any reference in this Agreement to the indemnity
provisions of the Company's Articles of Incorporation or Bylaws, the California
Corporations Code or to any applicable law shall refer to such provisions as
they shall be amended form time to time or to any successor provision, except
that any change in the Company's Articles of Incorporation or Bylaws shall only
apply to the extent that such amendment permits the Company to provide broader
indemnification rights to Indemnitee than currently provided.
7.8 Severability. Any provision of this Agreement, which is
unenforceable in any jurisdiction, shall be ineffective in such jurisdiction
to the extent of such unenforceability without invalidating the remaining
provisions of this Agreement, and any unenforceability in any jurisdiction
shall not invalidate or render unenforceable such provision in any other
jurisdiction.
-6-
<PAGE> 23
7.9 Applicable Law. The rights and obligations under this Agreement
shall be governed by, and construed in accordance with, the laws of the State of
California applicable to contracts between California residents made and to be
performed entirely within such State.
IN WITNESS WHEREOF, this Agreement has been entered into effective as of
the date first written above.
ESS TECHNOLOGY, INC.
By /s/ FRED S.L. CHAN
----------------------------
Fred S.L. Chan, President
Address: 48401 Fremont Blvd.
Fremont, CA 94538
INDEMNITEE: Signature: /s/ JOHN H. BARNET
--------------------
Name: John H. Barnet
-------------------------
Address:
----------------------
----------------------
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<PAGE> 24
EXHIBIT C
CONFIDENTIALITY AGREEMENT
<PAGE> 25
Employment Agreement Between_________________________
And ESS Technology Inc.
It is hereby agreed between _________________ and ESS Technology Inc. that
Employee shall be hired to work full-time for the Company, effective
_______________.
During the course of employment, Employee will come into contact with Company
technology, trade secrets, customer lists, marketing plans, etc. or similar
information of the company's customers. Employee shall treat all such material
as confidential and Employee shall not reveal any such information to any third
parties on any other than need-to-know basis without prior written consent of an
officer of the Company. This restriction shall remain in effect for a period of
five years after Employee first learns such information or until the information
otherwise becomes public knowledge.
As a condition of employment, Employee agrees that all designs, developments,
and improvements conceived or worked on by Employee during his-her term of
employment shall be the sole and exclusive property of the Company. Also,
Employee shall not engage in other business or other employment without prior
written approval from Employer.
Upon termination of employment, Employee agrees that he/she will not contact ESS
existing or contacted potential customers for a period of six months without
prior written consent of an officer of the Company. Employee further agrees that
he/she will not engage in any business in competition with ESS products for a
period of 2 years after termination of employment.
Employee is employed on an at-will basis and understands that, as an at-will
employee, both Employee and ESS can terminate the employment relationship at any
time with or without advance notice and with or without cause. This paragraph
reflects the full and complete agreement between Employee and ESS regarding the
at-will nature of the employment relationship, and Employee further understands
that no one other than the President of ESS has any authority to enter into any
contrary agreement and that any contrary agreement entered into by the President
of ESS and Employee must be in writing and must be signed by the President of
ESS.
This Agreement shall be interpreted and enforced in accordance with the laws of
the State of California.
/s/ JOHN H. BARNET /s/ SUSAN P. AUSTIN
- ----------------------------------- -----------------------------------
Employee Signature Employer Signature
9//18/96 9/18/96
- ----------------------------------- -----------------------------------
Date Date
<PAGE> 26
CONFIDENTIAL INFORMATION
AND INVENTION ASSIGNMENT AGREEMENT
----------------------
In consideration and as a condition of my employment, continued employment,
or consulting relationship by ESS Technology, Inc., a California corporation,
and/or by any companies which it owns, controls, or is affiliated with, or their
successors in business (the "Company"), and the compensation paid therefor:
1. CONFIDENTIALITY. I agree to keep confidential, except as the Company may
otherwise consent in writing, and not to disclose, or make any use of except for
the benefit of the Company, at any time either during or subsequent to my
employment or consulting relationship, any trade secrets, confidential
information, knowledge, data or other information of the Company relating to
products, processes, know-how, designs, formulas, test data, customer lists,
business plans, marketing plans and strategies, and pricing strategies or other
subject matter pertaining to any business of the Company or any of its clients,
customers, consultants, licensees or affiliates, which I may produce, obtain or
otherwise acquire during the course of my employment or consulting relationship,
except as herein provided. I further agree not to deliver, reproduce or in any
way allow any such trade secrets, confidential information, knowledge, data or
other information, or any documentation relating thereto, to be delivered or
used by any third parties without specific direction or consent of a duly
authorized representative of the Company.
I recognize that the Company has received and/or in the future may receive from
third parties confidential information, subject to a duty on the Company's part
to maintain the confidentiality of such information and to use it only for
certain limited purposes. I agree that I owe the Company and such third
parties, during the term of my employment with the Company and thereafter, a
duty to hold all such confidential information of third parties in the strictest
confidence and not to disclose it to any person or entity (except as necessary
in carrying out my work for the Company consistent with the Company's agreement
with such third party) or to use it for the benefit of anyone other than for
the Company or such third party (consistent with the Company's agreement
with such third party), without the express written authorization of an officer
of the Company.
2. CONFLICTING EMPLOYMENT; RETURN OF CONFIDENTIAL MATERIAL. I agree that
during my employment or consulting relationship with the Company I will not
engage in any other employment, occupation, consulting, or other activity
relating to the business in which the Company is now or may hereafter become
engaged, or which would otherwise conflict with my obligations to the Company.
In the event of my termination of employment or consulting relationship with
the Company for any reason whatsoever, I agree to promptly surrender and
deliver to the Company all records, materials, equipment, drawings, documents,
and data of any nature, and any copies thereof, pertaining to any invention,
trade secret or confidential information of the Company or to my employment,
and I will not take with me any description containing or pertaining to any
confidential information, knowledge or data of the Company which I may produce
or obtain during the course of my employment or consulting relationship. In the
event of the
page 1
<PAGE> 27
termination of my employment or consulting relationship, I agree to sign
and deliver the "Termination Certification" attached hereto as Exhibit A.
3. ASSIGNMENT OF INVENTIONS. I hereby assign and transfer to the Company my
entire right, title, and interest in and to all inventions, and any claims
for infringement concerning such inventions (as used in this Agreement,
"inventions" shall include, without limitation, ideas, improvements,
designs, and discoveries), whether or not patentable and whether or not
reduced to practice, made or conceived by me (whether made solely by me
or jointly with others) during the period of my employment or consulting
relationship with the Company which relate in any manner to the actual or
demonstrably anticipated business, work, or research and development of
the Company or its subsidiaries, or results from or is suggested by any
task assigned to me or its subsidiaries. I agree that all such inventions
are the sole property of the Company. This Agreement does not require
assignment of any invention which qualifies fully for protection under
Section 2870 of the California Labor Code (hereinafter "Section 2870"),
which provides as follows:
"(a) Any provision in an employment agreement which provides
that an employee shall assign, or offer to assign, any of his or her
rights in an invention to his or her employer shall not apply to an
invention that the employee developed entirely on his or her own time
without using the employer's equipment, supplies, facilities, or
trade secret information except for those inventions that either:
(1) Relate at the time of conception or reduction to
practice of the invention to the employer's business, or actual or
demonstrably anticipated research or development of the employer, or
(2) Result from any work performed by the employee for
the employer.
(b) To the extent a provision in an employment agreement
purports to require an employee to assign an invention otherwise
excluded from being required to be assigned under subdivision (a),
the provision is against the public policy of this state and is
unenforceable.""
I acknowledge that receipt and execution of this Agreement by me
constitutes written notification, as required by Section 2872 of the
California Labor Code, regarding the above Section 2870 and its
protective effect on certain inventions developed by me.
In the event any invention relating in any manner to the actual or
anticipated business or research and development of the Company or its
subsidiaries is made, conceived, first reduced to practice, or disclosed
by me whether solely or jointly with others under paragraph 2 within six
(6) months after ceasing to serve as an employee or consultant of the
Company, it is to be presumed that such invention was conceived or
resulted from developments made during the period of my relationship with
the Company and I agree that any such invention will be disclosed,
transferred, and assigned to the Company, subject to the provisions of
Section 2870.
page 2
<PAGE> 28
4. DISCLOSURE OF INVENTIONS; PATENTS. I agree that in connection with any
"invention" as defined in paragraph 3 above:
(a) I will disclose such invention promptly in writing to my immediate
superior at the Company, with a copy to the President, regardless of
whether I believe the invention is protected by Section 2870, in order
to permit the Company to claim rights to which it may be entitled
under this Agreement. Such disclosure shall be received in confidence
by the Company.
(b) I will, at the Company's request, promptly execute a written
assignment of title to the company for any invention required to be
assigned by paragraph 3 ("assignable invention") and I will preserve
any such assignable invention as confidential information of the
Company; and
(c) Upon request, I agree to assist the Company or its nominee in securing
(at its expense), during my employment and at any time thereafter, for
its own benefit patents and copyrights for such assignable inventions
in any and all countries, which inventions shall be and remain the
sole and exclusive property of the Company or its nominee whether or
not patented or copyrighted. I agree to execute such papers and
perform such lawful acts as the Company deems to be necessary to allow
it to exercise all rights, title and interest in such patents and
copyrights.
5. EXECUTION OF DOCUMENTS. In connection with paragraph 4(c), I further agree
to execute, acknowledge and deliver to the Company or its nominees upon
request and at its expense all such documents, without limitation, as the
Company may determine necessary or desirable to apply for and obtain and
perfect any intellectual property rights in any country on any assignable
inventions, including without limitation: applications for patents;
applications for trademark or copyrights registrations; assignments of
inventions and any copyright registrations or patents issued or to be
issued therefor; and such other documents that the Company deems
appropriate to protect the interest of the Company or its nominee in such
inventions, patents and copyrights and to vest title thereto in the Company
or its nominees.
6. MAINTENANCE OF RECORDS. I agree to keep and maintain adequate and current
written records of all inventions made by me (in the form of notes,
sketches, drawings and as may be specified by the Company), which records
shall be available to and remain the sole property of the Company at all
times.
7. PRIOR INVENTION. It is understood that all inventions, if any, patented or
unpatented, which I made prior to my employment or consulting relationship
by the Company, are excluded from the scope of this Agreement. To preclude
any possible uncertainty, I have set forth on Exhibit B attached hereto a
complete list of all of my prior inventions, including numbers of all
patents and patent applications, and a brief description of all unpatented
inventions which are not the property of a previous employer. I represent
and covenant that the list is complete and that, if no items are on the
list, I have no such prior inventions. I agree to notify the Company in
writing before I make any disclosure or perform any work on behalf of the
Company which appears to threaten or conflict with proprietary rights I
claim in any invention or idea. In the event of my failure to give such
notice, I agree that I will make no claim against the Company with respect
to any such inventions of ideas.
page 3
<PAGE> 29
8. OTHER OBLIGATIONS. I acknowledge that the Company from time to time may
have agreements with other persons or with the U.S. Government, or agencies
thereof, which impose obligations or restrictions on the Company regarding
inventions made during the course of work thereunder or regarding the
confidential nature of such work. I agree to be bound by all such
obligations and restrictions and to take all action necessary to discharge
the obligations of the Company thereunder.
9. TRADE SECRETS OF OTHERS. I represent that my performance of all the terms
of this Agreement and as an employee or consultant of the Company does not
and will not breach any agreement to keep in confidence proprietary
information, knowledge or data acquired by me in confidence or in trust
prior to my employment or consulting relationship with the Company, and I
will not disclose to the Company or induce the Company to use, any
confidential or proprietary information or material belonging to any
previous employer or others. I agree not to enter into any agreement
(either written or oral) in conflict with this Agreement.
10. AT-WILL EMPLOYMENT. Nothing in this Agreement constitutes a promise or
representation by the Company that it will employ me for any particular
period of time, or a promise or representation by me that I will work for
the Company for any particular period of time. Subject to the provisions of
the separate written agreement (if any) I may have with the Company, the
Company may terminate my employment or consulting relationship at any time,
with or without cause, and I may likewise terminate my employment or
consulting relationship with the Company at any time for any reason.
11. MODIFICATION. This Agreement may not be changed, modified, released,
discharged, abandoned, or otherwise amended, in whole or in part, except by
an instrument in writing, signed by me and the Company. I agree that any
subsequent change or changes in my duties, salary or compensation shall not
affect the validity or scope of this Agreement.
12. SOLICITATION. During my employment or consulting relationship, and for a
period of one year after any termination of such relationship, I will not
directly or indirectly solicit any of the Company's employees or key
employees of the Company's customers for employment with a person or entity
involved in marketing products or services competitive with the Company.
Key employees include supervisory personnel, executives, personnel in
charge of any department, section or subdivision, and project managers (or
directors) and senior personnel on any individual project or projects. I
further agree that all customers of the Company, and all prospective
customers from whom I have solicited business while employed with the
Company, shall be solely the customers of the Company. I therefore agree
that I will not, for a period of one year immediately following the
termination of my employment with the Company, either directly or
indirectly, solicit business, as to products or services competitive with
those or the Company, from any of the Company's customers with whom I have
had contact within one year prior to my termination.
13. ENTIRE AGREEMENT. I acknowledge receipt of this Agreement, and agree that
with respect to the subject matter thereof it is my entire agreement with
the Company, superseding any previous
page 4
<PAGE> 30
oral or written communications, representations, understandings, or
agreements with the Company or any officer or representative thereof.
14. SEVERABILITY. In the event that any paragraph or provisions of this
Agreement shall be held to be illegal or unenforceable, such paragraph or
provision shall be severed from this Agreement and the entire Agreement
shall not fail on account thereof, but shall otherwise remain in full
force and effect.
15. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon my heirs,
executors, administrators or other legal representatives and is for the
benefit of the Company, its successors and assigns.
16. GOVERNING LAW. This Agreement shall be governed by the laws of the State
of California.
17. COUNTERPARTS. This Agreement may be signed in two counterparts, each of
which shall be deemed an original and both of which shall together
constitute one agreement.
18. SURVIVAL. All provisions of this Agreement shall survive any termination
or severance of my employment or consulting relationship with the Company.
19. EQUITABLE RELIEF. I agree that it would be difficult to measure the
damage to the Company from any breach by me of any of the provisions of
paragraphs 1 through 9, that injury to the Company from such breach would
be impossible to calculate, and that money damages would therefore be an
inadequate remedy for such breach. Accordingly, I agree that if I breach
any of paragraphs 1 through 9, the Company shall be entitled, in addition
to all other remedies it may have, to injunctions or other appropriate
orders to retrain any such breach without showing or proving any actual
damage by the Company.
20. ADVICE OF COUNSEL. I have been given the opportunity to consult with
independent counsel with regard to this Agreement, and have consulted
with such counsel to the extent I deem necessary.
/s/ JOHN H. BARNET /s/ SUSAN P. AUSTIN
- ------------------------------------ -------------------------------
MY SIGNATURE WITNESS SIGNATURE
9/18/96 9-18-96
- ------------------------------------ -------------------------------
DATE OF SIGNATURE DATE OF SIGNATURE
<PAGE> 31
EXHIBIT A
TERMINATION CERTIFICATION
1. This Termination Certification is executed in accordance with that
certain Confidential Information and Invention Assignment Agreement dated
_______________________________________ signed by me (the "Agreement"), in
connection with the termination of my employment or consultant relationship with
ESS Technology, Inc., a California corporation (the "Company"). The capitalized
terms used herein shall have the same meaning as set forth in the Agreement
unless otherwise provided.
2. I certify that I have complied, and will continue to comply, with all
terms of the Agreement, including, without limitation, the provisions pertaining
to (i) nondisclosure of confidential information of the Company or its
subsidiaries, affiliates, successors, or assigns, and other third parties such
as clients, licensees, or consultants; (ii) disclosure and assignment of
Inventions; and (iii) return of all Company documents.
Dated:
------------------------
-----------------------------------
Signature of Employee/Consultant
-----------------------------------
Name of Employee/Consultant
(typed or printed)
page 6
<PAGE> 32
EXHIBIT B
DESCRIPTION OF
PRIOR INVENTIONS, DISCOVERIES, IMPROVEMENTS, PATENTS,
PATENT APPLICATIONS, AND UNPATENTED INVENTIONS
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
The foregoing constitutes all of the prior inventions, discoveries,
improvements, patents, patent applications and unpatented inventions of the
undersigned pursuant to paragraph 7 of the Agreement.
Dated: ______________________
_____________________________________________
Employee/Consultant
page 7
<PAGE> 33
EXHIBIT D
PRESS RELEASE
[ESS LOGO]
For Immediate Release
Contact: ESS Technology, Inc.
John Barnet Tel: (510) 492-1088
Vice President & Chief Financial Officer
ESS TECHNOLOGY, INC. ANNOUNCES THAT CHIEF FINANCIAL OFFICER
WILL RESIGN AT END OF AUGUST
FREMONT, CALIFORNIA, August 7, 1998 -- ESS Technology, Inc. (NASDAQ: ESST)
today announced that John H. Barnet, vice president-finance and administration,
chief financial officer and corporate secretary, will resign from the company at
the end of August. Barnet, who has served as an officer of the company since
October, 1996, will assist the company in the search for and transition to a new
chief financial officer and will provide consulting services to ESS through
year-end.
"John has made a significant contribution to the company. He has been
contemplating a change and wanted to complete certain programs before resigning
including the orderly conversion of our new management information system, which
will be accomplished this month. We are pleased that he will remain as a
consultant to the company," said Fred S.L. Chan, ESS' chairman and chief
executive officer.
"I have enjoyed working with the management and employees here at ESS, and
the decision to leave was not an easy one," said Barnet. "I remain a strong
supporter of the company and am pleased to continue my association with ESS."
ESS Technology, Inc. is a leading supplier of PC audio and digital video
solutions for the PC and consumer markets. ESS designs, develops, and markets
highly integrated mixed signal semiconductor and software solutions for
multimedia applications. ESS, headquartered in Fremont, California, has sales
and technical support offices in Austin and Houston, Texas; Irvine, California;
Bellevue, Washington; Beijing and Shenzhen, China; Tokyo, Japan; Taipei, Taiwan;
Seoul, Korea; and Hong Kong. ESS Technology is listed on Nasdaq Market System
under the symbol ESST. World Wide Web site: http://www.esstech.com
o0o
<PAGE> 1
[TOKAI BANK OF CALIFORNIA LOGO]
SECURED REVOLVING
PROMISSORY NOTE
$15,000,000.00 Los Angeles, California September 23, 1998
FOR VALUE RECEIVED, ESS TECHNOLOGY, INC. ("Borrower"), promises to pay to TOKAI
BANK OF CALIFORNIA, a California banking corporation, having an office at 300
South Grand Avenue, Los Angeles, California 90071 ("Lender"), or order, at said
office or at such other place as may be designated, from time to time, in
writing by Lender, the principal sum of FIFTEEN MILLION AND NO/100 DOLLARS
($15,000,000.00) in lawful money of the United States of America, plus interest
as hereinafter provided, on the principal sum from time to time outstanding
until paid. Interest, as hereinafter provided, shall be computed on the basis
of a 360 day year for actual days elapsed.
1. DEFINITIONS:
1.1 "Advances" shall mean those funds advanced by Lender to Borrower in
accordance with Section 3 of this Note.
1.2 "Basis Point" shall mean 1/100 of one (1) percent (.0001) and
therefore 100 basis points shall be equal to 1%.
1.3 "Deed of Trust" shall mean that certain Deed of Trust, Assignment of
Rents. Security Agreement and Fixture Filing dated September 23, 1998,
given by Borrower to Lender, as may be amended from time to time.
1.4 "Lender" shall mean Tokai Bank of California, a California banking
corporation and for the purposes of the Libor Rate, Reserves, Libor
Interest Period, Libor Business Day and Libor Rate Option the term
Lender shall also mean and include Tokai Bank Ltd., Los Angeles
Agency.
1.5 "Libor Business Day" shall mean any day on which Lender is open for
business in Los Angeles, California and any business day on which
commercial banks in the City of London, England, are open for dealings
in dollar deposits in the London Interbank Market.
1.6 "Libor Interest Period" shall mean a one (1) month to twelve (12)
month period of time, and only in those increments, commencing on the
date specified in Borrower's Libor Notice to Lender to commence a
Libor Interest Period and ending on the same numerical day of the last
month of the Libor Interest Period that corresponds to the numerical
day of the month that the Libor Interest Period commences provided
that:
(a) whenever the last day of a Libor Interest Period would otherwise
occur on a day other than a Libor Business Day, the last day of
such Libor Interest Period shall be extended to occur on the next
succeeding Libor Business Day; provided, however, that if such
extension would cause the last day of such Libor Interest Period
to occur the next following calendar month, the last day of such
Libor Interest Period shall occur on the next preceding Libor
Business Day; and
(b) whenever the first day of a Libor Interest Period occurs on a day
of an initial calendar month for which there is no numerically
corresponding day in the calendar month that succeeds such
initial calendar month by the number of months equal to the
number of months in such Libor Interest Period, such Libor
Interest Period shall end on the last Libor Business Day of such
succeeding calendar month; and
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<PAGE> 2
(c) notwithstanding the foregoing in no event shall any Libor Interest
Period be extended beyond the Maturity Date."
1.7 "Libor Notice" shall have the meaning as set forth in Section 4.1 hereof
and shall be in the form attached as Exhibit A.
1.8 "Libor Rate" shall mean the per annum rate equal to one hundred fifty basis
points (1.50%) plus Reserves, in excess of the following:
(a) the rate at which dollar deposits in immediately available funds are
contracted for by Lender in the London Interbank Market for a term
comparable to the Libor Interest Period set forth in the Libor Notice
to the Lender two (2) Libor Business Days prior to commencement of
the applicable Libor Interest Period in an amount approximately equal
to the Principal Balance for a term comparable to the Libor Interest
Period set forth in the Libor Notice to the Lender two (2) Libor
Business Days prior to commencement of the applicable Libor Interest
Period; or
(b) in the event that Lender does not specifically contract for dollar
deposits, as set forth above, then Lender shall determine the Libor
Rate using the indication teller rate quotes from the London
Interbank Market received at the London, England office of Lender at
11:00 a.m., London time, two (2) Libor Business Days prior to the
commencement of a Libor Interest Period, as being offered for dollar
deposits in an amount approximately equal to the Principal Balance
for a term comparable to the Libor Interest Period set forth in the
Libor Notice to Lender two (2) Libor Business Days prior to
commencement of the applicable Libor Interest Period. The Libor Rates
and/or all components thereof shall be calculated on the basis of a
360 day year for actual days elapsed. This determination of the
Libor Rate by Lender shall be binding and conclusive upon Borrower.
1.9 "Libor Rate Option" shall have the meaning set forth in Section 4, hereof.
1.10 "Loan Agreement" shall mean that certain Revolving Loan Agreement entered
into by and between Borrower and Lender, dated September 23, 1998, as it
may be amended from time to time, and is subject to all of the terms and
conditions thereof. All terms not defined herein shall have the same
meaning as the Loan Agreement. In the event of a conflict between the terms
of this Note and the Loan Agrement, the terms of this Note shall prevail.
1.11 "Maturity Date" shall mean October 1, 2001.
1.12 "Other Security Documents" shall mean all and any of the documents (other
than this Note, the Deed of Trust and the Loan Agreement) now or hereafter
executed by the Borrower or any guarantor of the indebtedness evidenced
hereby or others in favor of Lender which wholly or partially secure or
guarantee payment of this Note.
1.13 "Prime-Based Rate" shall mean the Prime Rate plus zero basis points (.0%).
The Prime-Based Rate shall be calculated on the basis of a 360 day year for
actual days elapsed.
1.14 "Prime Rate" shall mean the variable rate of interest per annum announced,
declared and/or published from time to time by Lender as its "Prime Rate"
with the understanding that Lender's "Prime Rate" is one of its base rates
and serves as a basis upon which effective rates of interest are calculated
for loans making reference thereto and may not be the lowest of Lender's
base rates.
1.15 "Principal Balance" shall mean the outstanding principal balance of this
Note from time to time.
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<PAGE> 3
1.16 "Reserves" shall mean Lender's determination of Lender's cost of
reserves required by, arising out of, and/or pursuant to any laws,
rules and/or regulations established by or promulgated by any
authority and/or agency having jurisdiction over Lender and/or The
Tokai Bank, Ltd., including but not limited to the Ministry of
Finance of Japan and/or the Board of Governors of the Federal
Reserve System of the united States, and by reason of example such
Reserves may include, but are not limited to, any reserve on
Eurocurrency Liabilities as defined and set forth in Regulation D at
the ratios provided in such Regulation, from time to time in effect,
it being agreed that any portion of the Principal Balance bearing
interest at a Libor Rate shall be deemed to constitute Eurocurrency
Liabilities, as defined by such regulation, and it being further
agreed that such Eurocurrency Liabilities shall be deemed to be
subject to such reserve requirements without benefit of or credit
for prorations, exceptions and/or offsets that may be available to
Lender from time to time, under such Regulation upon imposition of
any such Reserve requirements. The cost and actual amount of such
Reserves shall be determined by Lender, and such determination of
such costs and Reserves shall be binding and conclusive upon
Borrower, and all such costs and Reserves shall be rounded up to the
nearest 1/8 of 1%;
1.17 "Roll Over Date" shall mean the last day of the Libor Interest
Period.
2. Interest and principal shall be payable as follows:
2.1 Interest shall be due and payable monthly, in arrears, commencing on
November 1, 1998 and shall continue to be due and payable, in
arrears, on the 1st day of each calendar month thereafter until the
Maturity Date.
2.2 All portion of the Principal Balance not designated by Borrower as
bearing interest at the Libor Rate shall bear interest at the Prime
Based Rate.
The entire amount of the Principal Balance remaining unpaid, shall be due
and payable in full on Maturity Date together with all accrued and unpaid
interest and other sums due on this Note and/or secured by the Deed of
Trust.
3. This Note evidences a revolving line of credit as set forth in the Loan
Agreement. Advances under this Note may be requested orally by Borrower or
by an authorized person. All oral requests shall be confirmed in writing
on the day of the request and shall be subject to the terms and of the
Loan Agreement. All communications, instructions, or directions by
telephone or otherwise to Lender are to be directed to Lender's office
shown above. The following party or parties are authorized to request
advances under the Line of Credit until Lender receives from Borrower at
Lender's address shown above written notice of revocation of their
authority: FRED S. L. CHAN or DALE R. LINDLY or HOWARD HIDESHIMA. Borrower
agrees to be liable for all sums (a) advanced in accordance with the
instructions of an authorized person, (b) credited to any of Borrower's
account with Lender. (c) Advances to pay drawings on Letters of Credit,
and (d) all other obligations of Borrower under the Loan Agreement. Funds
once borrowed and repaid may be re-borrowed, provided that the total
principal indebtedness shall not exceed the amount permitted under Section
3 of the Loan Agreement. No Advances will be approved or made after the
Maturity Date.
4. Borrower shall have the right and/or option, from time to time, to elect
to have portions of Principal Balance bear interest at the Libor Rate
(herein "Libor Rate Option"), provided such election of rights and/or
options is made in the manner hereinafter set forth. Any election of
Borrower of the Libor Rate Option must be made in accordance with the
following:
4.1 For each and every election of the Libor Rate Option, Borrower shall
deliver to Lender a written notification or telex of Borrower's
election of such Libor Rate Option at least three (3) Libor Business
Days prior to the date of commencement of the Libor Interest Period
(herein "Libor Notice"). Each and every Notice must specify the
following:
Page 3 of 9
<PAGE> 4
(a) Amount of Principal Balance to bear interest at the Libor
Rate. Borrower must specify a minimum Principal amount of
$1,000,000.00, or more.
(b) The date the Libor Interest Period is to commence.
(c) The term of the Libor Interest Period which must be a
one (1) month to twelve (12) month period of time.
4.2 Lender shall, as soon as practicable after 3:00 p.m. Los Angeles
time two (2) Libor Business Days prior to the commencement of the
Libor Interest Period, determine the Libor Rate applicable to the
Principal Balance. Interest shall accrue at the Libor Rate
determined by the Lender for the Libor Interest Period commencing on
the date specified in the Libor Notice. The interest rate applicable
to the Principal Balance, with respect to which Borrower has elected
a Libor Rate, shall revert from the Libor Rate applicable thereto to
the Prime-Based Rate on the Roll Over Date applicable thereto,
unless Borrower timely exercises the Libor Rate Option with respect
thereto within the time periods provided herein. Lender shall be
under no duty or obligation to notify Borrower that the interest
rate on the Principal Balance is about to revert from a Libor Rate
to the Prime-Based Rate.
4.3 Borrower's right to exercise the Libor Rate shall be conditioned
upon there not being an uncured default under this Note, the Deed of
Trust, the Loan Agreement, or the other Security Documents.
4.4. Borrower shall not be permitted to elect a Libor Rate more than once
in any calendar month and the ending date for any Libor Interest
Period in such Libor Notice shall not extend beyond the Maturity
Date.
4.5 In the event, and on each occasion, that on the day two (2) Libor
Business Days prior to the commencement of a Libor Interest Period,
Lender shall determine (which determination shall be conclusive and
binding upon Borrower) that dollar deposits in an amount
approximately equal to the Principal Balance:
(a) are not generally available at such time in the London
Interbank Market; and/or:
(b) the rate and/or terms at which such dollar deposits is being
offered will not adequately and fairly reflect the cost to
Lender of making or maintaining a Libor Rate on the Principal
Balance, and/or of funding the same in the London Interbank
Market during such Interest period; or
(c) reasonable means do not exist for ascertaining a Libor Rate, or
(d) a Libor Rate on the Principal Balance would be in excess of the
maximum interest rate which Borrower may by law pay,
then Lender shall so notify Borrower and the Principal Balance shall
continue to bear interest at the Prime-Based Rate.
4.6 If any change in any Law or regulation or in the interpretation
thereof by any governmental authority charged with the
administration or interpretation thereof shall make it unlawful for
Lender to make and/or maintain Libor Rates with respect to the
Principal Balance or to give effect to its obligations as
contemplated hereby then the Libor Rate shall immediately terminate.
Lender shall notify Borrower of such termination and after such
notification any Libor Rate applicable to the Principal Balance
shall be automatically converted to the Prime-Based Rate, and any
such notice given by Lender to Borrower pursuant to this paragraph
shall, if lawful, be effective on the last day of any existing Libor
Interest Period.
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<PAGE> 5
5. Borrower recognizes and acknowledges that the cost to Lender of making or
maintaining Libor Rates with respect to the Principal Balance may
fluctuate and Borrower agrees to pay to Lender, in addition to Reserves,
such additional amounts that will compensate Lender, in Lender's sole
determination, for any additional costs and/or expenses of maintaining any
such Libor Rate as a result or by reason of Reserves and after the date of
this Note, any change, amendment and/or modification in any applicable
rule, law and/or regulation and/or in the interpretation and/or
administration thereof by any governmental authority of Japan and/or the
United States of America charged with the interpretation and/or
administration thereof (whether or not having the force and/or effect of
law) and/or by any court changing the basis of taxation of payments to
Lender of the Principal Balance and/or interest at a Libor Rate and/or any
other fees and amounts payable under this Note, the Deed of Trust, the
Loan Agreement, and/or the Other Security Documents or imposing, modifying
or applying any reserve, special deposit or similar requirement against
assets of, deposits with or for the account of, credit extended by, and/or
any other acquisition of funds for loans by Lender, and/or imposing on
Lender or the London Interbank Market any other condition affecting this
Note, the Deed of Trust, the Loan Agreement, and/or the Other Security
Documents and/or any portion of the Principal Balance bearing interest at
a Libor Rate so as to increase the cost to Lender of making or maintaining
a Libor Rate with respect to any portion of the Principal Balance and/or
to reduce the amount of any sum received and/or receivable by Lender under
this Note, the Deed of Trust, the Loan Agreement, or the other Security
Documents (whether of principal, interest and/or otherwise), by an amount
deemed by Lender to be material, but without duplication for payments
required under Section 1.16 above.
Any amount and/or amounts payable by Borrower to Lender pursuant to this
paragraph shall be paid by Borrower to Lender within ten (10) days after
the Lender sends Borrower written notification setting forth the amount
due and the basis for the determination from time to time, of such amount
or amounts, which notice shall be conclusive and binding upon Borrower.
Failure on the part of Lender to send such notice and/or demand
compensation for any increased costs in any Libor Interest Period shall
not constitute a waiver of Lender's rights to demand compensation for any
increased costs incurred during any such Libor Interest Period or in any
other subsequent or prior Libor Interest Period.
6. In addition to all other sums due hereunder, Borrower hereby agrees to
indemnify Lender against any loss or expense, and to pay Lender upon
demand any and all amounts that Lender may sustain or incur as a
consequence of any default by Borrower in the payment of any portion of
the Principal Balance bearing interest at a Libor Rate, or any part
thereof of interest accrued thereon at a Libor Rate, as and when due,
and/or the occurrence of any event specified in this Note, the Deed of
Trust, the Loan Agreement, and/or the Other Security Documents including,
but not limited to, any loss and/or reasonable expense sustained and/or
incurred in liquidating or re-employing deposits from third parties
required to effect or maintain any Libor Rate with respect to any portion
of the Principal Balance. Lender shall provide Borrower a statement
explaining the amount of any such loss or expense, which statement shall
be conclusive and binding upon Borrower.
7. Borrower shall have the right at any time to prepay any portion of the
Principal Balance bearing interest at the Prime-Based Rate without premium
or penalty. Borrower shall have the right at any time following three (3)
calendar days prior written notice to Lender, to prepay any portion of the
Principal Balance bearing interest at the LIBOR Rate only in the event
that Borrower shall pay to Lender, as and for a prepayment premium, an
amount computed pursuant to the following formula:
(Amount Being Prepaid) x [(a - b)/360] x c
For the purpose hereof, "a" shall mean the interest rate for this Note on
the date of prepayment, "b" shall mean Lender's certificate of deposit
rate for certificates of deposit of more than $100,000 maturing on the
maturity date of the applicable Libor Interest Period; and "c" shall mean
the actual number of days between the date of prepayment and the maturity
of the applicable Libor Interest Period. The deposit rate of "b" shall be
determined as of the date of prepayment. In the event "b" is greater than
"a" there will be no prepayment premium to either party.
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<PAGE> 6
Any such prepayment shall not result in a reamortization, deferral,
postponement, suspension or waiver of any and all other payments due under
this Note.
8. This Note is secured by, among other things, the Deed of Trust executed by
Borrower, as trustor, in favor of Lender, as beneficiary, encumbering,
hypothecating, pledging and securing Borrower's right, title and interest
in and to certain personal and real property located in the County of
Alameda, California, as more particularly described and/or set forth in the
Deed of Trust. The Deed of Trust contains, among other provisions, a
provision for the immediate acceleration of this Note upon the occurrence
of any Default, and/or event of default under said Deed of Trust,
including, but not limited to, any sale, transfer, conveyance, encumbrance
and/or alienation of Borrower's right, title and/or interest (or any
portion thereof) in the real and/or personal property described and/or set
forth in said Deed of Trust.
9. All payments received by Lender from or for the account of Borrower, due
hereunder may be applied by Lender, in its sole and absolute discretion, in
the following manner, or in any other order or manner as Lender chooses:
9.1 First: To pay any and all interest due, owing and/or accrued;
9.2 Second: To pay any and all costs, advances, expenses or fees due,
owing and/or payable to Lender, or paid or incurred by Lender, arising
from or out of this Note, the Deed of Trust, the Loan Agreement, and
the Other Security Documents; and
9.3 Third: Payment of the outstanding principal balance on said Note.
All records of payments received by Lender shall be maintained at Lender's
office, and the records of Lender shall, absent manifest error, be binding
and conclusive upon Borrower. The failure of Lender to record any payment
or expense shall not limit or otherwise affect the obligations of borrower
under this Note.
10. Interest, late charges, costs, or expenses that are not received by Lender
within ten (10) calendar days from the date such interest, late charges,
costs, or expenses become due, shall, at the sole discretion of Lender, be
added to the Principal balance and shall from the date due bear interest at
the Default Rate specified below.
11. Whenever any payment to be made under this Note shall be due on a day other
than a day on which the Lender is open for business ("Business Day"),
including Saturdays, Sundays and/or legal holidays generally recognized by
banks doing business in California, then the due date for such payment
shall be automatically extended to the next succeeding Business Day, and
such extension of time shall in such cases be included in the computation
of the interest portion of any payment due hereunder.
12. All payments under the Note shall be made by Borrower without any offset,
decrease, reduction or deduction of any kind or nature whatsoever,
including, but not limited to, any decrease, reduction or deduction for, or
on account of, any offset, withholdings, present or future taxes, present
or future reserves, imposts or duties of any kind or nature that are
imposed or levied by or on behalf of any government and/or taxing agency,
body or authority by or for any municipality, state, or nation. If at any
time, present or future, Lender shall be compelled by any law, rule,
regulation and/or any other such requirement which on its face or by its
application requires and/or establishes reserves, or payment, deduction or
withholding of taxes, imposts or duties to act such that it causes or
results in a decrease, reduction and/or dedication, (as described and/or
set forth above) in payment received by Lender; then Borrower shall pay to
Lender such additional amounts, as Lender shall deem necessary and
appropriate, such that every payment received under this Note, after such
decrease, reserve, reduction, deduction, payment and/or required
withholding, shall not be reduced in any manner whatsoever.
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<PAGE> 7
13. Any one or more of the following events or occurrences shall constitute a
default under this Note (hereinafter "Default");
13.1 Lender does not receive a payment within 10 days of the due date
hereunder in the amount and manner as set forth herein; or
13.2 Borrower does not faithfully perform within the applicable grace
period each and every term, condition and/or provision contained in
the Deed of Trust, the Loan Agreement or Other Security Documents
strictly in accordance therewith; or
13.3 Borrower or any other obligor or trustor otherwise commits a default
as specified in the Loan Agreement or Other Security Documents which
is not cured prior to expiration of any applicable grace period; or
13.4 Borrower or any other obligor or trustor commits a default as
specified in any other obligation of Borrower owing to Lender.
Upon the occurrence of a Default hereunder, Lender may, in its sole and
absolute discretion, declare the entire unpaid principal balance, together
with all accrued and unpaid interest thereon, and all other amounts and/or
payments due hereunder, immediately due and payable, without notice and/or
demand.
14. From and after the occurrence of any Default in this Note, whether by
non-payment, maturity, acceleration, non-performance or otherwise, and
until such Default has been cured, all outstanding amounts under this Note
(including, but not limited to, interest, costs and late charges) shall
bear interest at a per annum rate (the "Default Rate") equal to five
percentage points (5%) over the Prime-Based Rate.
15. Time is of the essence for all payments and other obligations due under
this Note. Borrower acknowledges that if any payment required under this
Note is not received by Lender within ten (10) days after the same becomes
due and payable, Lender will incur extra administrative expenses (i.e., in
addition to expenses incident to receipt of timely payment) and the loss
of the use of funds in connection with the delinquency in payment.
Because, from the nature of the case, the actual damages suffered by
Lender by reason of such administrative expenses and loss of use of funds
would be impracticable or extremely difficult to ascertain. Borrower
agrees that five percent (5%) of the amount of the delinquent payment,
together with interest accruing on the entire unpaid principal balance of
this Note at the Default Rate, as provided above, shall be the amount of
damages which Lender is entitled to receive upon such breach, in
compensation therefor. Therefore, Borrower shall, in such event, without
further demand or notice, pay to Lender, as Lender's monetary recovery for
such extra administrative expenses and loss of use of funds, liquidated
damages in the amount of five percent (5%) of the amount of the delinquent
payment (in addition to interest at the Default Rate). The provisions of
this paragraph are intended to govern only the determination of damages in
the event of a breach in the performance of Borrower to make timely
payments hereunder. Nothing in this Note shall be construed as in any way
giving Borrower the right, express or implied, to fail to make timely
payments hereunder, whether upon payment of such damages or otherwise. The
right of Lender to receive payment of such liquidated and actual damages,
and receipt thereof, are without prejudice to the right of Lender to
collect such delinquent payments and any other amounts provided to be paid
hereunder or under the Deed of Trust, the Loan Agreement and/or the Other
Security Documents, or to declare a default hereunder or under the Deed of
Trust, Loan Agreement and/or the Other Security Documents.
16. Borrower hereby agrees to pay any and all costs and/or expenses paid
and/or incurred by Lender by reason of, as a result of, or in connection
with, this Note, the Deed of Trust, the Loan Agreement and/or the Other
Security Documents, including, but not limited to, any and all attorneys'
fees and related cots whether such costs and/or expenses are paid or
incurred in connection with the
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<PAGE> 8
enforcement of this Note, the Deed of Trust, the Loan Agreement, and/or the
Other Security Documents, or any of them, the protection and/or
preservation of the collateral or security for this Note and/or any other
rights, remedies and/or interests of Lender, whether or not suit is filed.
Borrower's agreement to pay any and all such costs and expenses includes,
but is not limited to, costs and expenses incurred in enforcing any
judgment obtained by Lender and in connection with any and all appeals
therefrom. All such costs and expenses are immediately due and payable to
Lender by Borrower whether or not demand therefor is made by Lender.
17. Borrower hereby waives grace, diligence, presentment, demand, notice of
demand, dishonor, notice of dishonor, protest, notice of protest, any and
all exemption rights against the indebtedness evidenced by this Note and
the right to plead any statute of limitations as a defense to the repayment
of all or any portion of this Note, and interest thereon, to the fullest
extent allowed by law, and all compensation of cross-demands pursuant to
California Code of Civil Procedure Section 431.70. No delay, omission
and/or failure on the part of the Lender in exercising any right and/or
remedy hereunder shall operate as a waiver of such right and/or remedy or
of any other right and/or remedy of Lender.
18. This Note is subject to the express condition that at no time shall
Borrower be obligated, or required, to pay interest on the Principal
Balance at a rate which could subject Lender to either civil or criminal
liability as a result of such rate being in excess of the maximum rate
which Lender is permitted to charge. If, by the terms of this Note,
Borrower is, at any time, required or obligated to pay interest on the
Principal Balance at a rate in excess of such maximum rate, then the rate
of interest under this Note shall be deemed to be immediately reduced to
such maximum rate, and interest payable hereunder shall be computed at such
maximum rate, and any portion of all prior interest payments in excess of
such maximum rate shall be applied, and/or shall retroactively be deemed to
have been payments made, in reduction of the Principal Balance.
19. This Note may be amended, changed, modified, terminated and/or canceled
only by a written agreement signed by the party against whom enforcement is
sought for any such action. This Note shall be governed by, and construed
under, the laws of the State of California.
20. Borrower, and each person executing this Note on Borrower's behalf, hereby
represents and warrants to Lender that, by its execution below, that
Borrower has the full power, authority and legal right to execute and
deliver this Note and that the indebtedness evidenced hereby constitutes a
valid and binding obligation of Borrower without exception or limitation.
In the event that this Note is executed by more than one person or entity,
the liability hereunder shall be joint and several. Any married person who
is obligated on this Note, directly or indirectly, agrees that recourse may
be had to such person's separate property in addition to any and all
community property of such person.
IN WITNESS WHEREOF, Borrower has duly executed this Note the day and year
first above written.
"BORROWER"
ESS TECHNOLOGY, INC.
By: /s/ Fred S. L. Chan
------------------------------------------
Fred S. L. Chan
Chairman/President/Chief Executive Officer
Page 8 of 9
<PAGE> 9
EXHIBIT A
LIBOR NOTICE
Pursuant to Section 4 of the Secured Promissory Note (the "Note") in the amount
of $15,000,000.00 dated as of September 23, 1998, made by ESS TECHNOLOGY, INC.
("Borrower") in favor of TOKAI BANK OF CALIFORNIA, a California banking
corporation ("Lender"), this represents Borrower's request to elect a Libor
Rate with respect to $_________ (Minimum Principal Balance of $1,000,000.00 is
required) on the Principal Balance of the Note for the following Libor interest
Period:
1. The date the Libor Interest Period is to commence is ________________
(this must be a Libor Business Day).
2. The term of the Libor Interest Period is _________________ (Circle One:
one (1) month to twelve (12) month)
Capitalized terms used herein without definition shall have the meanings
assigned to those terms in the Note.
Borrower certifies that (i) the representations and warranties contained in the
Loan Agreement are true, correct and complete in all material respects on and
as of the date hereof to the same extent as though made on and as of the date
hereof; (ii) no Event of Default has occurred and is continuing under the Loan
Agreement; and (iii) Borrower has performed in all material respects all
agreements and satisfied all conditions under the Loan Agreement provided to be
performed by it on or before the date hereof.
Date:
-----------------------
"BORROWER"
ESS TECHNOLOGY, INC.
By:
-------------------------
Print Name:
-----------------
Title:
----------------------
Page 9 of 9
<PAGE> 10
REVOLVING LOAN AGREEMENT
THIS REVOLVING LOAN AGREEMENT ("Agreement") is made as of September 23, 1998 by
and between ESS TECHNOLOGY, INC. ("Borrower"), and TOKAI BANK OF CALIFORNIA, a
California banking corporation ("Lender").
A. Borrower has applied to Lender for a loan in the principal amount of
FIFTEEN MILLION AND NO/100THS DOLLARS ($15,000,000.00).
B. Lender has agreed to make the loan to Borrower upon the terms and
conditions hereof.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto hereby agree as
follows:
1. DEFINITIONS AND INTERPRETATIONS.
For purposes of this Agreement, the following terms shall have the
following meanings:
1.1 DEFINITIONS. The definitions set forth in the Recitals are
incorporated herein by reference.
"Advance" shall mean any advance of Loan Proceeds by the Lender under
the Revolving Loan.
"Agreement" shall mean this Loan Agreement, either as originally
executed or as it may from time to time be supplemented, modified, or
amended.
"Affiliate" shall mean any person or business entity, directly or
indirectly, related to, in control of, controlled by or under the
common control of Borrower, or of a successor thereof, whether through
merger, consolidation, transfer of assets or otherwise.
"Appraised Value" means the appraised value as determined by the
Lender from time to time.
"Assets" shall have the meaning usually given that term in accordance
with GAAP, but shall exclude sums due to Borrower from Affiliates
(other than subsidiaries).
"Business Day" shall mean a day of the year on which banks are not
required or authorized to close in California.
"Compensating Balances" shall mean the average balances in the
Borrower's non-interest bearing account with Lender during the
applicable period less the sum of float reserves and balances required
to cover service charges to maintain the account. These amounts will
be computed in accordance with customary Lender practices which may
change from time to time.
"Contingent Liabilities" shall mean all contingent liabilities as
determined and computed in accordance with GAAP.
"Cross Default" shall mean as described in the Note(s).
"Current Assets" shall mean all current assets as determined and
computed in accordance with GAAP (excluding loans to officers and
employees).
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<PAGE> 11
"Current Liabilities" shall mean all current liabilities as determined and
computed in accordance with GAAP.
"Debt" shall mean and includes all of Borrower's debts and liabilities as
determined in accordance with GAAP.
"Debt Service" shall mean the payments of principal and interest due on a loan
equal to the current principal balance of the Loan using a loan term of five
years, a 25 year amortization and an interest rate at 3-month LIBOR plus 1.5%
per annum.
"Debt Service Coverage Ratio" shall mean the ratio of (a) earnings before
interest, taxes, depreciation and amortization (excluding Research and
Development expenses related to acquisitions) to (b) Debt Service.
"Deed of Trust" shall mean the Deed of Trust, Assignment of Rents, Security
Agreement and Fixture Filing given by Borrower, as Trustor, to American Title
Company, as Trustee for the benefit of Lender, as Beneficiary.
"Drawing" shall mean a "drawing" as described in Section 3.1(b)(vii).
"ERISA" shall mean the Employee Retirement Income Security Act of 1974, as the
same may be amended from time to time, and, unless the context otherwise
requires, the regulations thereunder.
"Event of Default" shall mean any of those events specified in Section 5 hereof.
"Exchange Rate" shall mean the rate at which Lender offers to sell Japanese Yen
for U.S. Dollars on the applicable date.
"Financial Statements" means balance sheets, income statements, reconciliation
of capital structure, statements of sources and applications of funds together
with appropriate notes and footnotes in accordance with GAAP. Financial
Statements provided Lender in accordance with this Agreement shall be audited.
"Financing Statement" shall mean a financing statement (Form UCC-1) given by
Borrower to Lender.
"Fixtures" shall mean the fixtures as defined in the Deed of Trust.
"GAAP" shall mean generally accepted accounting principles consistently applied
and maintained throughout the period indicated and consistent with the prior
financial practice of Borrower, except for changes mandated by the Financial
Accounting Standards Board or any similar accounting authority of comparable
standing.
"Governmental Agency" or "Government Agency" shall mean any federal, state or
local governmental or quasi-governmental agency, authority, board, bureau,
commission, department, instrumentality or public body, court, administrative
tribunal, or public utility.
"Insurance Policies" shall mean any of the policies of insurance specified in
Section 4.1 hereof.
"Laws" shall mean, collectively, all federal, state, and local laws, rules,
regulations, ordinances, and codes.
"Letter of Credit" shall mean a Commercial Letter of Credit issued by Lender
pursuant to Section 3.1(b) which includes both sight letters of Credit and
usance Letters of Credit.
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"Liabilities" shall have the meaning usually given that term in accordance with
GAAP.
"Loan" shall mean the loan described in Section 3 of this Agreement in the
principal amount of FIFTEEN MILLION AND NO/100ths Dollars ($15,000,000.00).
"Loan Documents" shall mean the Note, Deed of Trust, this Agreement, and such
other documents as Lender may require Borrower to give to Lender as evidence of
and/or security for the Loan and the Guaranty.
"Loan Proceeds" shall mean all funds advanced by Lender as a Loan to Borrower
under this Agreement.
"Maturity Date" shall mean October 1, 2001.
"Net Profit" shall have the meaning usually given that term in accordance with
GAAP (excluding Research and Development expenses related to acquisitions).
"Note" shall mean the Note(s) of Borrower payable to the order of Lender,
evidencing the Loan.
"Organizational Documents" shall mean:
(a) Borrower's Articles of Incorporation.
(b) An affidavit of Borrower signed by an officer of Borrower, where
applicable, in form and substance satisfactory to Lender affirming the
authority of Borrower to borrow the Loan and enter into the Loan
Documents, and affirming the names and signatures of all officers of
Borrower authorized to execute documents in connection with the Loans.
"PBGC" means the Pension Benefit Guaranty Corporation or any successor
established under ERISA.
"Permitted Encumbrances" shall mean the matters approved by Lender shown in the
report of title of the Title Company.
"Person" shall mean an individual, corporation, partnership, joint venture,
trust or unincorporated organization or a Government Agency.
"Personality and Fixtures" shall mean the equipment and fixtures as defined in
the Deed of Trust.
"Plan" means an employee benefit plan or other plan maintained for employees of
Borrower and covered by Title IV of ERISA.
"Prime Rate" shall mean Lender's Prime Rate which is the rate announced from
time to time by Lender to be the Prime Rate as reflected in the books and
records of Lender. The Prime Rate may vary from time to time and the interest
rate shall automatically change on the same day the Prime Rate changes.
"Property" shall mean the Property as defined in the Deed of Trust.
"Quick Assets" shall mean cash, cash equivalents, marketable securities plus
net accounts receivable.
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<PAGE> 13
"Quick Ratio" shall mean Quick Assets divided by Current Liabilities.
"Release" shall mean a Release as provided under Section 3.1(c).
"Tangible Net Worth" shall mean the excess of Assets over Liabilities,
excluding, however, from the determination of Assets: (i) all assets
that would be classified as intangible assets under GAAP, including
without limitation, goodwill (whether representing the excess of cost
over book value of assets acquired or otherwise), negative goodwill,
foundry investments, patents, trademarks, trade names, copyrights,
franchises and deferred charges (including, without limitation,
unamortized debt discount and expense, organization costs and research
and development costs); and (ii) subordinated debt.
"Title Company" shall mean American Title Company.
"Title Policy" shall mean a standard American Land Title Association
Lender's policy of title insurance for the Property, insuring Lender
in the amount of the Loans and with such other endorsements as Lender
may request.
"Working Capital Advance" shall mean all Advances made pursuant to
Section 3.1(a).
1.2 ACCOUNTING TERMS. All accounting terms not specifically defined
herein shall be construed in accordance with GAAP consistent with
those applied in the preparation of the Financial Statements referred
to in Section 4.15 and all financial data submitted pursuant to this
Agreement shall be prepared in accordance with such principles.
1.3 USE OF DEFINED TERMS. Any defined terms used in the plural shall
include the singular and such terms shall encompass all members of the
relevant class.
1.4 SCHEDULES AND EXHIBITS. All schedules and exhibits to this Agreement,
either as originally existing or as the same may from time to time be
supplemented, modified or amended, are incorporated herein by
reference.
1.5 REFERENCES. Any reference to this Agreement or any other document
shall include such document both as originally executed and as it may
from time to time be supplemented and modified. References herein to
Paragraphs, Sections and Exhibits shall be construed as references to
this Agreement unless a different document is named.
1.6 OTHER TERMS. The term "document" is used in its broadest sense and
encompasses agreements, certificates, opinions, consents, instruments
and other written material of every kind. The terms "including" and
"include" shall mean "including (include), without limitation."
2. REPRESENTATIONS AND WARRANTIES OF THE BORROWER.
Borrower hereby represents and warrants to Lender as of the date of this
Agreement, the date the Loan Proceeds are disbursed to Borrower, and each
and every date during the existence of the Loan, or any portion thereof,
as the context admits or requires, that:
2.1 BORROWER'S CAPACITY. Borrower is and shall continue to be a
corporation duly organized and existing under the Laws of the State
of California, and duly qualified to do business in any state in
which the nature of its business requires it to be so qualified.
2.2 VALIDITY OF LOAN DOCUMENTS. The Loan Documents are and shall continue
to be in all respects valid and binding upon Borrower according to
their terms, subject to all Laws, including equitable principles,
insolvency laws, and other matters applying to creditors generally;
provided, however, that the implementation of such Laws do not and
will not affect the ultimate realization of the security afforded
thereby. The execution and delivery by
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<PAGE> 14
Borrower of and the performance by Borrower of all its obligations under
the Loan Documents have been duly authorized by all necessary action and do
not and will not
(a) Require any consent or approval not heretofore obtained or any other
person holding any interest or entitled to receive any interest issued
or to be issued by Borrower or otherwise;
(b) Violate any provision of the Organizational Documents or other
agreements to which Borrower is bound;
(c) Result in or require the creation or imposition of any mortgage, deed
of trust, pledge, lien, security interest, claim, charge, right of
others or other encumbrance of any nature (other than under the Loan
Documents) upon or with respect to any property now owned or leased
or hereafter acquired by Borrower.
(d) Violate any provision of any Laws, or of any order, writ, judgment,
injunction, decree, determination, or award;
(e) Result in a breach of or constitute a default under, cause or permit
the acceleration of any obligation owed under, or require any consent
under any indenture or loan or credit agreement or any other
agreement, lease, or instrument to which Borrower is a party or by
which Borrower or any property of Borrower is bound or affected.
2.3 BORROWER NOT IN DEFAULT OR VIOLATION. Borrower is not in default under or
in violation of any Laws, order, writ, judgment, injunction, decree,
determination or award. Borrower is not in default under any obligation,
agreement, instrument, loan, or indenture, whether to Lender or otherwise,
or any lease. No event has occurred and is continuing, or would result
from the making of the Loans or an Advance, which constitutes an Event of
Default, or would constitute an Event of Default but for the requirement
that notice be given or time elapse or both.
2.4 NO GOVERNMENTAL APPROVALS REQUIRED. Borrower does not require any
authorization. consent, approval, order, license, exemption from, or
filing, registration, or qualification with any Governmental Agency in
connection with the execution and delivery by Borrower, and the
performance by Borrower, of all or any of its obligations under, the Loan
Documents, except that filing and/or recording with Governmental Agencies
may be required to perfect liens, security interest, or other charges or
encumbrances granted Lender by Borrower.
2.5 TAX LIABILITY. Borrower has filed and shall file all tax returns
(federal, state, and local) required to be filed and has paid and shall
pay all taxes shown thereon to be due and all property taxes due, including
interest and penalties, if any.
2.6 FINANCIAL STATEMENTS. All financial statements, information and other
data which have been and which may hereafter be submitted by Borrower to
Lender are true, accurate and correct and have been and will be prepared
in accordance with generally accepted accounting principles consistently
applied and accurately represent Borrower's financial condition and, as
applicable, the other information disclosed therein. Since the most recent
submission of any such financial statement, information or other data to
Lender, the Borrower represents and warrants that no material adverse
change in Borrower's financial condition or operations has occurred which
has not been fully disclosed to Lender in writing.
2.7 PENDING LITIGATION. There are no actions, suits, or proceedings pending,
or to the knowledge of Borrower threatened, against or affecting the
Borrower, or involving the validity or enforceability of any of the Loan
Documents or the priority of the lien thereof, at Law or in equity, or
before or by any Governmental Agency, except actions, suits, and
proceedings that are fully covered by insurance or which, if adversely
determined, would not substantially
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<PAGE> 15
impair the ability of Borrower to perform each and every one of its
obligations under and by virtue of the Loan Documents; and Borrower
is not in default with respect to any order, writ, injunction,
decree, or demand of any court or any Governmental Agency.
2.8 VIOLATION OF LAWS. Borrower has no knowledge of any violations or
notices of violations of any Laws relating to the Property.
2.9 COMPLIANCE WITH ZONING ORDINANCES AND ENVIRONMENTAL LAWS. Borrower
and the Property presently comply with, and will in the future
comply fully with, all applicable Laws, and all permits and
approvals issued thereunder, affecting the improvements to be
located upon the Property, the sale, operation, leasing or financing
of the Property and the intended occupancy, use and enjoyment of the
Property, including, but not limited to, all applicable subdivision
Laws, licenses and permits, building codes, zoning ordinances,
environmental protection Laws, flood disaster Laws, and all Laws
pertaining to industrial hygiene and the environmental conditions
on, under or about the Property, including, but not limited to, soil
and groundwater condition. Borrower does not presently, and will
not in the future, use, store, manufacture, generate, transport to
or from, or dispose of any toxic substances, hazardous materials,
hazardous wastes, radioactive materials, flammable explosives or
related material on or in connection with the Property or the
business of Borrower on the Property. Borrower does not presently,
and will not in the future, permit any lessee on the Property to
use, store, manufacture, generate, transport to or from, or dispose
of any toxic substances, hazardous materials, hazardous waste,
radioactive materials, flammable explosives, related material on or
in connection with the Property or the business on the Property.
("Toxic substances," "hazardous materials" and "hazardous waste"
shall include, but not be limited to, such substances, materials and
wastes which are or become regulated under applicable Laws or which
are classified as hazardous or toxic under applicable Laws.)
Borrower shall not seek, make or consent to any change in the
zoning, conditions of use, or any other applicable land use permits,
approvals or regulations pertaining to the Property, or any portion
thereof, which would constitute a violation of the warranties and
representations herein contained, or would otherwise impair the
ability of Borrower to complete construction of any improvements now
underway constituting the Property, or would change the nature of
the use or occupancy of the Property.
2.10 COMPLIANCE WITH ERISA. Borrower does not and shall not maintain any
employee benefit plan or other plan maintained for employees of
Borrower which is or might be deemed to be covered by Title IV or
ERISA, except plans that are or shall be in compliance with all
applicable provisions of ERISA. No Reportable Event has occurred or
is continuing with respect to any Plan.
2.11 SOLVENCY. Borrower is and shall continue to be able to pay its debts
as they mature and the realizable value of its Assets is, and at all
times that it may have obligations hereunder shall continue to be,
sufficient to satisfy any and all obligations hereunder.
2.12 PRINCIPAL PLACE OF BUSINESS. The principal place of business of
Borrower is, and will continue to be, as set forth under Section
7.11 of this Agreement. In the event that Borrower hereafter intends
to move its principal place of business, it shall first give at
least thirty (30) days' prior written notice to Lender of its
intention so to move, the date that such move is anticipated, and
its new address. No later than ten (10) days after commencement of
the move by Borrower, Borrower will deliver such new Financing
Statements (on Form UCC-1), Continuation Statements (on Form UCC-2)
or other instruments as Lender may require.
2.13 PERMITS. Borrower possesses all licenses, permits, franchises,
patents, copyrights, trademarks, and trade names, or rights thereto,
that are necessary to conduct its business substantially as now
conducted and as presently proposed to be conducted, and Borrower is
not in material violation of any valid rights of others with respect
to any of the foregoing.
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2.14 YEAR 2000 COMPLIANT. Borrower has undertaken a detailed review and
assessment of all areas within its business operations that could be
adversely affected by the risk that computer applications (including
computer systems and equipment containing embedded microchips,
including those supplied by others and those with which Borrower
interfaces) may be unable to recognized and perform properly
date-sensitive functions involving certain dates prior to, and any
date subsequent to, December 31, 1999 (such risk being referred to as
the "Year 2000 Problem"). Borrower has developed a detailed plan and
time line for addressing the Year 2000 Problem on a timely basis and
had implemented that plan in accordance with such timetable as the
date hereof. The implementation of such plan in accordance with such
timetable will result in Borrower being able properly to perform, on a
timely basis, date-sensitive functions for all dates prior or
subsequent to January 1, 2000 (that is to be "Year 2000 Compliant").
The cost to Borrower of becoming Year 2000 Compliant will not have a
material adverse effect.
3. THE LOAN.
3.1 LINE OF CREDIT. As long as no event of default has occurred, Lender
will provide to Borrower a revolving line of credit ("Line of Credit")
in the maximum amount outstanding at any one time not to exceed the
lesser of Fifteen Million and No/100 Dollars ($15,000,000.00) or 65%
of the Appraised Value of the Property less the staff residential
building. The Line of Credit which shall be evidenced by that certain
promissory note of even date herewith and in such maximum amount
(together with all amendments, renewals, extensions, substitutions and
replacements the "Note"). Lender shall provide the following
sub-facilities under the Line of Credit:
(a) Working Capital Advances. Lender shall make Working Capital
Advances to Borrower, provided that the amount of all such
Advances outstanding at any one time shall not exceed Fifteen
Million and No/100 Dollars ($15,000,000.00).
(b) Letters of Credit Sub-Facility. Subject to the terms of this
Agreement, and upon the request of Borrower, made at any time
and from time to time, and so long as no Event of Default has
occurred under this Agreement, Lender agrees to issue Letter(s)
of Credit on behalf of Borrower for business purposes agreed to
by Lender subject to the following conditions:
(i) The aggregate amount of Letter(s) of Credit outstanding may
not exceed the sum of $5,000,000.00;
(ii) The Letter(s) of Credit shall be issued in United States
(U.S.) Dollars and/or Japanese Yen;
(iii) The expiration date of each Letter of Credit shall be no
longer than one hundred twenty (120) days after the date of
issuance including extensions and amendments, and in no
event later than one hundred twenty (120) days after the
Maturity Date. In no event shall issuance of Letters of
Credit be permitted after the Maturity Date;
(iv) Borrower shall pay Lender's fees for issuance, amendments,
negotiations, acceptance, discrepancy and other matters
related to each Letter of Credit as set forth in Exhibit A;
(v) Borrower shall execute Lender's customary Application for
Letter of Credit and Reimbursement Agreement for each
Letter of Credit;
(vi) The Letter(s) of Credit shall be in the form customarily
used by Lender; and
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<PAGE> 17
(vii) Upon receipt form any beneficiary under a Letter of Credit
of a demand for payment under such Letter of Credit (each a
"Drawing"), Lender shall promptly notify the Borrower. Each
Drawing shall be payable in full by the Borrower on the date
hereof, without demand or notice of any kind. If the Borrower
fails to repay a Drawing on the date of Drawing, Lender is
authorized to make a Working Capital Advance to reimburse Lender
for the Drawing. The obligation of the Borrower to reimburse
Lender for Drawings shall be absolute, irrevocable and
unconditional under any and all circumstances whatsoever and
irrespective of any set-off, counterclaim or defense to payment
which Borrower may have or have had against Lender (except such as
may arise out of the Lender's gross negligence or willful
conduct) or any other person, including, without limitation, and
set-off, counterclaim or defense based upon or arising out of.
(1) Any lack of validity or enforceability of this Agreement or any
of the Loan Documents;
(2) Any amendments or waive of or consent to departure from the
terms of any Letter of Credit;
(3) The existence of any claim, set-off, defense or other right
which Borrower or any other person may have at any time against
beneficiary or an transferee of any Letter of Credit (or any
person for whom any beneficiary or such transferee may be
acting); or
(4) Any allegation that any demand, statement or any other document
presented under any Letter of Credit is forged, fraudulent,
invalid or insufficient in any respect, or any statement therein
being untrue or inaccurate in any respect whatsoever or any
variations in punctuation, capitalization, spelling or format of
the drafts or any statement presented in connection with any
Drawing.
(viii) On the date of each drawing of a Letter of Credit in Japanese Yen the
amount of the drawing shall be converted to U.S. Dollars by using the
Exchange Rate in effect on such date.
(ix) For the purpose of determining compliance with 3.1(b)(i) above Letters
of Credit issued in Japanese Yen shall be converted to U.S. Dollars
using the Exchange Rate on the date of the determination and shall be
multiplied by 120%. If the aggregate amount of Letters of Credit as
so determined exceeds $5,000,000.00. Borrower shall deposit with
Lender an amount equal to such excess until the Borrower is in
compliance with 3.1(b)(i) at which time the deposit shall be returned
to Borrower. Any such deposit held by Lender and not returned to
Borrower by reason of a failure to comply with 3.1 shall be used by
Lender to reimburse Lender for drawings on Letters of Credit.
(c) CARGO RELEASE. Lender agrees to provide cargo releases ("Releases") for
the release of inventory and equipment (prior to delivery of required
documents) purchased with the use of Letters of Credit issued by Lender.
The Releases shall be subject to the following conditions:
(i) The Release shall be in a form acceptable to Lender;
(ii) The amount of outstanding Releases shall not exceed $5,000,000.00;
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<PAGE> 18
(iii) The fee for each Release shall be a Flat Fee of $60.00;
(iv) Borrower shall provide indemnification to Lender in a form
acceptable to Lender.
In no event shall the sum (without duplication) of (i) the face amount
outstanding Working Capital Advances plus (ii) the amount of the
outstanding Letter of Credit plus (iii) the amounts of outstanding Releases
exceed the lesser of $15,000,000.00 or 65% of the Appraised Value of the
Property less the staff residential building. For the purpose of
determining the amount of outstanding Letters of Credit issued in Japanese
Yen, such Letters of Credit shall be converted to U.S. Dollars using the
Exchange Rate on the date of the determination and that amount shall be
multiplied by 120%.
3.2 ADVANCE PROCEDURE. Advances shall be made in accordance with a written
request therefor executed by Borrower and delivered to Lender and shall be
conclusively deemed to have been made at the request of and for the benefit
of the Borrower, (i) when credited to any deposit account of Borrower
maintained with Lender or (ii) when paid in accordance with Borrower's
written instructions. Subject to the conditions precedent contained in
Section 3.7. Advances shall be made by Lender upon telephonic or written
request in form acceptable to Lender received from Borrower, which request
shall be received not later than 3:00 p.m. (California time) on the date
specified for such Advance, which date shall be a Business Day. Requests
for Advances received after such time, may at Lender's option be deemed to
be a request for an Advance to be made on the next succeeding Business Day.
3.3 RECORD OF ACCOUNT. Lender shall maintain on its books a record of account
in which Lender shall make entries for each Advance and such other debits
and credits as shall be appropriate in connection with the Line of Credit
(the "Line Account"). Lender shall provide Borrower with a monthly
statement on the Borrower's Line Account, which statement shall be
considered to be correct and conclusively binding on Borrower unless
Borrower notifies Lender to the contrary within 30 days after the
Borrower's receipt of any such statement which it deems to be incorrect.
3.4 CONDITIONS PRECEDENT TO LOAN. The obligation of Lender to make the Loan is
subject to and expressly conditioned upon the following:
(a) Borrower, at its sole expense, shall deliver to Lender, at its office
in Los Angeles, California, on or before the date of the first Advance
the following, in form and substance satisfactory to Lender, in
Lender's sole opinion and judgment:
(i) The Note;
(ii) The Deed of Trust;
(iii) The Financing Statement;
(iv) This Agreement;
(v) The Loan Disbursement Instructions;
(vi) The Agreement to Furnish Insurance;
(vii) The Hazardous Substances Indemnity Agreement;
(viii) The Corporate Resolution to Borrow;
(ix) The Title Policy or evidence of a commitment thereof;
(x) The Insurance Policies;
(xi) Such additional assignments, agreements, certificates,
reports, approvals, instruments, documents, financing
statements, consents, and opinions as Lender may reasonably
request;
(b) Review and approval by Lender, its counsel, or both, of true and
correct copies of Borrower's Organizational Documents, matters
affecting the Property, and all other Loan Documents;
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<PAGE> 19
(c) Review and approval by Lender of true and correct copies of
Financial Statements of Borrower;
(d) No suit, action, or other proceeding of material consequence
shall be pending or threatened which seeks to restrain or
prohibit the consummation of the transactions contemplated by
this Agreement, or to obtain damages or other relief in
connection therewith; and
(e) Payment by Borrower to Lender of the loan fee of $37,500.00.
4. BORROWER'S COVENANTS.
In addition to anything else herein stated, Borrower agrees:
4.1 INSURANCE. To obtain and at all times maintain hazard and liability
insurance in amount, form and issued by a company or companies
satisfactory to Lender. The insurance is to include business
interruption, boiler and machinery and glass insurance. Lender is to
be a loss payable payee under the hazard insurance and an additional
insured under said liability insurance. Said liability insurance is
to include, but not be limited to, workman's compensation and
employer's liability insurance. In the event any portion of the
Property is determined to be in a Flood Hazard Area at any time as
reported by the U.S. Secretary of the Department of Housing and
Urban Development, Borrower shall obtain and at all times maintain
flood hazard insurance satisfactory to Lender. All policies of a
certificate acceptable to Lender shall be delivered to Lender
together with evidence of payment of premium thereon and an agreement
to give Lender at least thirty (30) Business Days' prior notice of
any material changes, termination, or expiration of the policies.
All insurance policies provided under any lease with tenants of the
Property shall be assigned to Lender as additional security.
4.2 RIGHT OF ENTRY. Lender and Lender's employees or agents shall have
the right at all times to enter upon Borrower's premises for whatever
purpose Lender deems appropriate, including, without limitation,
inspection of the premises and the posting of such notices and other
written or printed material thereon as Lender may deem appropriate
or desirable.
4.3 LENDER MAY EXAMINE BOOKS AND RECORDS. Lender shall have the right,
from time to time, acting by and through its employees or agents,
to examine the books, records, and accounting data of Borrower; and
to make extracts therefrom or copies thereof. Borrower shall promptly
make such books, records, and accounting data available to Lender,
as stated above, upon written request, and upon like request shall
promptly advise Lender, in writing, of the location of such books,
records, and accounting data.
4.4 NO AUTOMATIC SET-OFF. The existence of the deposit account
described in Paragraph 4.17 and/or the fact of any sum or sums
being on deposit in said account shall in no way constitute a
set-off against or be deemed to compensate the obligation of the
Loan or any payment or performance due under this Agreement or any
of the other Loan Documents, unless and until the Lender, by
affirmative action, shall so apply said account or any portion
thereof and then only to the extent thereof so designated by
Lender.
4.5 PAYMENT OF TAXES. Borrower shall pay and discharge all taxes,
assessments, and governmental charges or levies imposed upon
Borrower or upon its income or profits, or upon any properties
belonging to it prior to the date on which penalties attach
thereto, and all lawful claims which, if unpaid might become
a lien or charge of a material nature upon any of its properties,
provided that Borrower shall not be required to pay any such tax,
assessment, charge, levy or claim which is being contested in good
faith and by proper proceedings if it maintains adequate reserves
with respect thereto.
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4.6 PRESERVATION OF EXISTENCE. Borrower, if other than a natural person, will,
so long as Borrower remains obligated on the Loan, do all things necessary
to preserve and keep in full force and effect its organizational status,
and will comply with all Laws, orders and decrees of any Governmental
Agency or court applicable to Borrower or to the Project.
4.7 COMPLIANCE WITH LAWS AND CONTRACTS. Borrower shall comply with the
requirements of all applicable Laws and orders of any Governmental Agency,
provided that if Borrower has not so complied by the date prescribed in
any such Law or order, regulation, Borrower shall comply therewith by the
date set forth in any order of the Governmental Agency charged with the
enforcement of such Law, rule or regulation if such date is later, and
comply with all contracts, agreements, indentures or instruments by which
it is bound.
4.8 MAINTENANCE OF PROPERTIES. Borrower shall use its best efforts to
maintain and preserve, or cause to be maintained and preserved, all of its
properties, necessary or useful in the proper conduct of its business,
including such as may be under lease, in good working order and condition,
ordinary wear and tear excepted.
4.9 FINANCIAL COVENANTS AND RATIOS. Borrower shall maintain the following
financial covenants and ratios on a quarterly basis except as otherwise
indicated;
(a) Maximum Debt To Tangible Net Worth of 1.00 to 1.00.
(b) Minimum Debt Service Coverage Ratio of 1.10 to 1.00 for fiscal year
ending December 31, 1999 and 1.25 to 1.00 for subsequent fiscal year
ends.
(c) Minimum Tangible Net Worth of $65,400,000.00.
(d) Minimum Quick Ratio of .80 to 1.00.
(e) Unencumbered Cash, Cash Equivalents and Marketable Securities of not
less than $15,000,000.00.
4.10 LIENS. Borrower shall not create, incur, assume or suffer to exist any
mortgage, deed of trust, pledge, lien, security interest or other charge or
encumbrance (including the lien or retained security title of a
conditional vendor) or any nature upon or with respect to the Property, or
assign or otherwise convey any right to receive income, except that the
foregoing restrictions shall not apply to mortgages, deeds of trust,
pledges, liens, security interests or other charges or encumbrances, or
taxes, assessments or governmental charges or levies on property of
Borrower, or in respect of a judgment or awards against Borrower if the
same shall not at the time be delinquent or thereafter can be paid without
penalty, or if Borrower shall have set aside adequate reserves therefor as
determined or approved by its certified independent accounting firm, or,
if in the case of judgments or awards, execution on the same shall have
been effectively stayed pending appeal or review or insured or bonded to
the extent to Borrower's liability in respect thereof, and in the case of
all of the foregoing, the same are being contested in good faith and by
appropriate proceedings.
4.11 LIMITATIONS ON BORROWINGS. Borrower shall not create, incur, assume or
suffer to exist any indebtedness, other than ordinary trade payables or
other indebtedness incurred in the ordinary course of business of more
than $30,000,000.00 from Lender and other financial institutions without
the prior written consent of Lender.
4.12 YEAR 2000 COMPLIANT. Borrower will at all times after the date of this
Agreement be Year 2000 Compliant as defined in Section 2.14.
4.13 INTENTIONALLY DELETED.
4.14 OTHER COVENANTS. Borrower further agrees to:
Page 11 of 19
<PAGE> 21
(a) Notify Lender promptly of any claims of litigation in excess of 10%
of total assets of Borrower.
(b) Notify Lender of sale, merger, acquisition and/or combination;
concurrent with notification to the public.
4.15 REPORTING REQUIREMENTS. So long as Borrower shall have any obligation to
Lender under this Agreement, Borrower shall deliver to the Lender the
following financial statements and reports:
(a) As soon as practicable and in any event within fifteen (15) days after
Borrower knows or should reasonably have known of the commencement of
any legal action against it, except actions seeking money judgment
that are fully insured or bonded, a report of the commencement of
such action containing a statement signed by the chief financial
officer of Borrower setting forth details of such legal action and
any action Borrower proposes to take with respect thereto;
(b) Within fifteen (15) days of the occurrence of any Event of Default or
event which, with the giving of notice or lapse of time, or both,
would constitute an Event of Default, a report regarding such Event
of Default or event setting forth details and describing any action
which Borrower proposes to take with respect thereto, signed by an
officer of Borrower;
(c) Any change in name of Borrower or use of any trade names or trade
styles not presently used;
(d) As soon as practicable and in any event within sixty (60) days after
the end of each quarter of each fiscal year of Borrower, balance
sheets of Borrower as of end of each such quarter and a statement of
earnings and surplus for each such quarter, setting forth in each
case in comparative form the corresponding figures for the
corresponding period of the preceding fiscal year, all in reasonable
detail and duly certified (subject to year-end audit adjustments) by
the chief financial officer of Borrower as having been prepared in
accordance with GAAP consistent with those applied in the preparation
of the Financial Statements referred to in subsection 4.15(e);
(e) As soon as available and in any event within one hundred twenty days
(120) after the end of each fiscal year of Borrower, a copy of the
Borrower's Financial Statements for such year, audited by an
independent certified public accountant of recognized standing
acceptable to Lender;
(f) Intentionally deleted.
(g) Promptly upon receipt thereof, one (1)copy of any other report
submitted to Borrower by independent accountants in connection with
any annual, interim or special audit made by them of the books of
Borrower;
(h) Within fifteen (15) days of (i) any contact from any Governmental
Agency concerning any environmental protection Laws, including, but
not limited to, any notice of any proceeding or inquiry with respect
to the presence of any hazardous waste, toxic substances or hazardous
materials on the Property or the migration thereof from or to other
property, (ii) any and all claims made or threatened by any third
party against or relating to the Property concerning any loss or
injury resulting from toxic substances, hazardous waste, or
hazardous materials, or (iii) Borrower's discovery of any occurrence
or condition on any property adjoining or in the vicinity of the
Property that could cause the Property , or any part thereof, to be
subject to any restrictions on the ownership, occupancy,
transferability, or loss of the Property under any Law,
Page 12 of 19
<PAGE> 22
Borrower shall deliver to Lender a report regarding such contact
and setting forth in detail and describing any action which
Borrower proposes to take with respect thereto, signed by an
officer of Borrower;
(i) Within fifteen (15) business days of becoming aware of any
developments or other information which may materially and
adversely affect Borrower's properties, business, prospects,
profits or condition (financial or otherwise) or Borrower's
ability to perform this agreement or the other Loan Documents,
telephonic or telegraphic notice specifying the nature of such
development or information and such anticipated effect, which
shall be promptly confirmed in writing;
(j) Within thirty (30) days from date of Lender's request, but
not more often than quarterly, an accounts receivable aging
report, accounts payable aging report and inventory summary
report in form and substance acceptable to Lender.
(k) Such other information respecting the business, properties or
the condition or operations, financial or otherwise, of Borrower
as the Lender may from time to time request.
4.16 Compensating Balance Requirement. Borrower shall maintain with Lender
Compensating Balances as shown on Borrower's monthly account analysis
statements from Lender calculated on a quarterly basis equal to
$300,000.00. In the event the required Compensating Balances are not
maintained, Borrower shall pay to Lender a fee equal to 110% of the
Libor Borrowing Rate per annum during the applicable quarter times the
amount of the Compensating Balance deficiency ("Deficiency") times the
days in the quarter divided by 360. The fee shall be calculated by
Lender on a quarterly basis and paid by the Borrower on the 15th day
following the end of each quarter. For the purposes of computing the
fee which is due; (a) the Deficiency shall be equal to $300,000.00
less the Compensating Balances during the applicable quarter; and (b)
Libor Borrowing Rate shall mean the average of the Libor Rates, as
defined in the Note, during the applicable quarter.
4.17 Deposit Relationship. Borrower shall maintain one of its primary
deposit relationships with Lender at all times during the term of this
Agreement.
5. EVENTS OF DEFAULT.
An "Event of Default" shall be deemed to have occurred hereunder if:
5.1 DEFAULT UNDER LOAN DOCUMENTS. Borrower shall fail to pay principal or
interest, or both, when due under the terms of the Notes; or Borrower
shall fail to perform or observe any term, covenant, or agreement
contained in this Agreement or in any of the other Loan Documents,
which failure may be cured by the payment of money, and, in any of
such events, such failure shall continue for a period of ten (10)
days from the date such payment or performance was due; or Borrower
shall fail to perform or observe any term, covenant or agreement
contained in this Agreement or in any of the other Loan Documents,
which failure cannot be cured by the payment of money and such
failure shall continue for a period of thirty (30) days after the
Lender shall have given written notice to Borrower specifying such
default; or
5.2 BREACH OF WARRANTY. Any warranties or representations made or agreed
to be made in this Agreement or in any of the other Loan Documents
shall be breached in any material respect or shall prove to be false
or misleading in any respect when made; or
5.3 LITIGATION AGAINST BORROWER. Any suit shall be filed against
Borrower, which, if adversely determined, could substantially impair
the ability of Borrower to perform any or all of its
Page 13 of 19
<PAGE> 23
obligations under and by virtue of this Agreement or any of the other
Loan Documents, unless Borrower's counsel furnishes to Lender its
opinion, to the satisfaction of Lender and Lender's counsel, that, in
its judgment the suit is essentially without merit; or
5.4 LEVY UPON PROPERTY. A levy shall be made on the Property under any
process and such levy shall not be bonded over or shall continue
unstayed for thirty (30) days or more.
5.5 ACCELERATION OF OTHER DEBTS. Borrower does, or omits to do, any act,
or any event occurs, as a result of which any material obligation of
Borrower, whether or not arising hereunder and/or relating to or
affecting the Property or Borrower's ability to perform hereunder,
may be declared immediately due and payable by the holder thereof; or
5.6 TRANSFER OF PROPERTY. Borrower shall, without the prior written
consent of Lender, which consent the Lender may either give or
withhold in its sole and absolute opinion and judgment voluntarily,
involuntarily or by operation of law, sell, transfer, convey, lease,
or encumber the Property, or any interest therein except as permitted
herein, or shall contract for such sale, transfer, conveyance, or
encumbrance; or
5.7 BANKRUPTCY. Borrower shall fail to pay its debts as they become due,
or shall make an assignment for the benefit of its creditors, or
shall admit, in writing, its inability to pay its debts as they
become due, or shall file a petition under any chapter of the
Federal Bankruptcy Code or any similar law, now or hereafter
existing, or shall become "insolvent" as that term is generally
defined under the Federal Bankruptcy Code, or shall in any
involuntary bankruptcy case commenced against it file an answer
admitting insolvency or inability to pay its debts as they become
due, or shall fail to obtain a dismissal of such case within thirty
(30) calendar days after its commencement or convert the case from
one chapter of the Federal Bankruptcy Code to another chapter, or be
the subject of an order for relief in such bankruptcy case, or be
adjudged a bankrupt or insolvent, or shall have a custodian,
trustee, or receiver appointed for, or have any court take
jurisdiction of, its properties, or any part thereof, in any
voluntary or involuntary proceeding, including, but not limited to,
those for the purpose of reorganization, arrangement, dissolution, or
liquidation, and such custodian, trustee, or receiver shall not be
discharged, or such jurisdiction shall not be relinquished, vacated,
or stayed within thirty (30) days after the appointment; or
5.8 BORROWER STATUS. Without Lender's prior written consent, Borrower
shall be liquidated, dissolved, or fail to maintain it status as a
going concern; or
5.9 EXECUTION LEVY. Execution shall have been levied against the Property
or any lien creditor shall commence suit to enforce a judgment lien
against the Property and such action or suit shall not have been
bonded or shall continue unstayed for a period of thirty (30) days or
more;
5.10 ATTACHMENT. Any proceeding shall be brought, the object of which is
that any pat of the Lender's commitment to make the Advances
hereunder shall at any time be subject or liable to attachment or
levy by any creditor of Borrower; or
5.11 DESTRUCTION. Any part or all of the Property is materially damaged or
destroyed by fire or other casualty and the loss shall prove to be
inadequately covered by insurance actually collected or in the
process of collection to restore the Property to its condition prior
to such fire or other casualty; or
5.12 EMINENT DOMAIN. Any material part or all of the Property shall be the
subject of an eminent domain proceeding or a taking adverse to the
interest of Lender; or
5.13 MISREPRESENTATION AND/OR NON-DISCLOSURE. Borrower has made certain
statements and disclosures in order to induce Lender to make the Loan
and enter into this Agreement, and,
Page 14 of 19
<PAGE> 24
in the event Borrower has made material misrepresentations of failed
to disclose any material fact, Lender may treat such misrepresentation
or omission as a breach of this Agreement. Such action shall not
affect any remedies Lender may have for such misrepresentation or
non-disclosure, as such, or under its Deed of Trust for such
misrepresentation or concealment; or
5.14 ERISA. Any of the following events occur or exist with respect to
Borrower:
(a) Any Reportable Event with respect to any Plan;
(b) The filing under Title IV of ERISA of a notice of intent to
terminate any Plan or the termination of any Plan;
(c) Any event or circumstance that might constitute grounds entitling
the PBGC to institute proceedings for the termination of, or for
the appointment of a trustee to administrate any Plan, or the
institution by the PBGC of any such proceeding; or
5.15 FINANCIAL CONDITION. There shall be any material adverse changes in
Borrower's financial condition.
6. REMEDIES.
6.1 CEASE PAYMENT AND/OR ACCELERATE. Upon, or at any time after, the
occurrence of an Event of Default or upon the occurrence of a default
in any other joint and/or several obligation or obligations of the
Borrower, to Lender, Lender shall have no obligation to make any
further Advances, issue Letters of Credit or provide Releases, and
all sums disbursed or advanced by Lender and all accrued and unpaid
interest thereon, together with an amount equal to the amount of all
outstanding Letters of Credit and Releases shall, at the option of
Lender, become immediately due and payable, and Lender shall be
released from any and all obligations to Borrower under the terms of
this Agreement.
6.2 RIGHTS AND REMEDIES NON-EXCLUSIVE. In addition to the specific
rights and remedies hereinabove mentioned. Lender shall have the right
to avail itself of any other rights or remedies to which it may be
entitled, at Law or in equity, including, but not limited to, the
right to realize upon any or all of its security, and to do so in any
order. Furthermore, the rights and remedies set forth above are not
exclusive, and Lender may avail itself of any individual right or
remedy set forth in this Agreement, or available at Law or in equity,
without utilizing any other right or remedy.
7. GENERAL CONDITIONS AND MISCELLANEOUS.
7. NONLIABILITY OF LENDER. Borrower acknowledges and agrees that by
accepting or approving anything required to be observed, performed,
fulfilled, or given to Lender pursuant to this Agreement or the other
Loan Documents, including any certificate, Financial Statement,
appraisal or insurance policy, Lender shall not be deemed to have
warranted or represented the sufficiency, legality, effectiveness or
legal effect of the same, or of any term, provision, or condition
thereof, and such acceptance or approval thereof shall not be or
constitute any warranty or representation to anyone with respect
thereto by Lender.
7.2 NO THIRD PARTIES BENEFITTED. This Agreement is made for the purpose
of defining and setting forth certain obligations, rights, and
duties of Borrower and Lender in connection with the Loan. It shall
be deemed a supplement to the Note and the other Loan Documents, and
shall not be construed as a modification of the Note or the other
Loan Documents, except as provided herein. It is made for the sole
protection of Borrower and Lender, and Lender's successors and
assigns. No other person shall have any rights of any nature
hereunder or by reason hereof or the right to rely hereon. In the
event of a conflict between this
Page 15 of 19
<PAGE> 25
Agreement and the Note, the provisions of the Note shall control. In
the event of a conflict between this Agreement and the Deed of Trust,
the provisions of this Agreement shall control.
7.3 INDEMNITY BY BORROWER. Borrower hereby indemnifies and agrees to hold
harmless Lender and its directors, officers, agents and employees
(individually and collectively the "Indemnitee(s)") from and against:
(a) Any and all claims, demands, actions or causes of action that
are asserted against any Indemnitee by any person if the claim,
demand, action or cause of action, directly or indirectly,
relates to a claim, demand, action or cause of action that the
person has or asserts against Borrower; and
(b) Any and all liabilities, losses, costs or expenses (including
court costs and attorney's fees) that any Indemnitee suffers or
incurs as a result of the assertion of any claim, demand, action
or cause of action specified in this Section 7.3.
7.4 CHANGE IN LAWS. In the event of the enactment, after the date of
this Agreement, of any Laws: (a) deducting from the value of property
for the purpose of taxation of any lien or security interest thereon;
(b) imposing upon Lender the payment of the whole or any part of the
taxes or assessments or charges or liens herein required to be paid
by Borrower, (c) changing in any way the Laws relating to the
taxation of deeds of trust or mortgages or security agreements, or
the interest of the mortgagee or secured party in the property
covered thereby; or (d) the manner of collection of such taxes so as
to affect the Deed of Trust secured thereby or Lender, then, and in
any such event, Borrower, upon demand by Lender, shall promptly pay
such taxes, assessments, charges or liens, or reimburse Lender
therefor, if Borrower shall be prohibited from paying such tax or from
reimbursing Lender for the amount thereof, Borrower shall execute
a modification to the Loan Documents which modification shall
increase the interest rate payable pursuant to the Note so as to
permit Lender to maintain its yield as if such tax had not been
imposed. If Borrower shall be prohibited from executing the
above-referenced modifications. Lender may, in Lender's sole opinion
and judgment, declare the principal of all amounts disbursed and
owing under the Note, this Agreement, and the other Loan Documents
(including all obligations secured by this Agreement or the other
Loan Documents) and all other indebtedness of Borrower to Lender,
together with interest thereon, to be forthwith due and payable,
regardless of any other specified maturity or due date.
7.5 TIME IS OF THE ESSENCE. Time is of the essence of this Agreement and
of each and every provision hereof. The waiver by Lender of any
breach or breaches hereof shall not be deemed, nor shall the same
constitute, a waiver of any subsequent breach or breaches.
7.6 BINDING EFFECT; ASSIGNMENT. This Agreement shall be binding upon and
inure to the benefit of Borrower and Lender and their respective
successors and assigns, except that Borrower may not assign its rights
hereunder or any interest herein without the prior written consent of
Lender. Lender shall have the right to assign its rights under this
Agreement or the other Loan Documents and to grant participations in
the Loan to others, but all waivers or abridgements of Borrower's
obligations that may be granted from time to time by Lender in
writing, shall be binding upon such assignees or participants.
7.7 EXECUTION IN COUNTERPARTS. This Agreement and any other Loan
Document, except the Note and the Deed of Trust, may be executed in
any number of counterparts, and any party hereto or thereto may
execute any counterpart, each of which, when executed and delivered,
will be deemed to be an original, and all of which counterparts of
this Agreement or any other Loan Document, as the case may be, taken
together will be deemed to be but one and the same instrument. the
execution of this Agreement or any other Loan
Page 16 of 19
<PAGE> 26
Document by any party hereto or thereto will not become effective until
counterparts hereon or thereof, as the case may be, have been executed by
all the parties hereto or thereto.
7.8 INTEGRATION; AMENDMENTS; CONSENTS. This Agreement, together with the
documents referred to herein, constitutes the entire agreement of the
parties touching upon the subject matter hereof, supersedes any prior
negotiations or agreements on such matter. No amendment, modification or
supplement of any provision of this Agreement or any of the other Loan
Documents shall be effective unless in writing, signed by Lender and
Borrower, and no waiver of any of Borrower's obligations under this
Agreement or any of the other Loan Documents or consent to any departure by
Borrower therefrom shall be effective unless in writing, signed by Lender,
and then only in the specific instance and for the specific purpose given.
7.9 COSTS, EXPENSES AND TAXES. Borrower shall pay to Lender, on demand:
(a) The reasonable attorneys' fees and out-of-pocket expenses incurred by
Lender in connection with the negotiation, preparation, execution,
delivery and administration of the Agreement and any other Loan
Document and any matter related thereto, including, but not limited
to, appraisals of the Property;
(b) The reasonable costs and expenses of Lender in connection with the
enforcement of this Agreement and any other Loan Document and any
matter related thereto, including the reasonable fees and
out-of-pocket expenses of any legal counsel, independent public
accountants, and other outside experts retained by Lender, and
(c) All costs, expenses, fees, premiums and other charges relating to or
arising from this Agreement or any of the other Loan Documents or any
transactions contemplated hereby or thereby or the compliance with any
of the terms and conditions hereof or thereof, including, but not
limited to, recording fees, filing fees, credit report fees, release
or reconveyance fees, title insurance premiums and the cost of realty
tax service for the term of the Loan.
All sums paid or expended by Lender under the terms of this Agreement
shall be considered to be, and shall be, a part of the Loan. All such
sums, together with all amounts to be paid by Borrower pursuant to
this Agreement, shall bear interest from the date of expenditure at
the default rate provided in the Note, shall be secured by the Deed of
Trust and shall be immediately due and payable by Borrower upon
demand.
7.10 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All representations and
warranties of Borrower contained herein or in any other Loan Document shall
survive the making of the Loan and the execution and delivery of the Note,
and are material and have been or will be relied upon by Lender,
notwithstanding any investigation made by Lender or on behalf of Lender.
For the purpose of this Agreement, all statements contained in any
certificate, agreement, Financial Statement, or other writing delivered by
or on behalf of Borrower pursuant hereto or to any other Loan Document or
in connection with the transactions contemplated hereby or thereby shall be
deemed to be representations and warranties of Borrower contained herein or
in the other Loan Documents, as the case may be.
7.11 NOTICES. All notices, requests, demands, directions, and other
communications provided for hereunder and under any other Loan Document (a
"Notice"), must be in writing and must be mailed, telegraphed, delivered or
sent by telex, cable or other form of electronic written communication to
the appropriate party at its respective address set forth below or, as to
any party, at any other address as may be designated by it in a written
notice sent to the other parties in accordance with this Section.
Page 17 of 19
<PAGE> 27
Any notice given by telegram, telex, cable or other form of electronic
written communication must be confirmed within forty-eight (48) hours by
letter mailed or delivered to the appropriate party at its respective
address. If any notice is given by mail, it will be effective three (3)
calendar days after being deposited in the mails with first-class or air
mail postage prepaid; if given by telegraph or cable, when delivered to the
telegraph company with charges prepaid; if given by telex or other form of
electronic written communication, when sent; or if given by personal
delivery, when delivered.
Such notices will be given to the following:
To Lender: TOKAI BANK OF CALIFORNIA
300 South Grand Avenue, 5th Floor
Los Angeles, California 90071
Attn: Loan Servicing Department
To Borrower: ESS TECHNOLOGY, INC.
48401 Fremont Boulevard
Fremont, California 94538
Attn: Fred S.L. Chan, Chairman/President/
Chief Executive Officer
7.12 FURTHER ASSURANCES. Borrower shall, at its sole expense and without
expense to Lender, do, execute and deliver such further acts and documents
as Lender from time to time may reasonably require for the purpose of
assuring and confirming unto Lender the rights hereby created or intended,
now or hereafter so to be, or for carrying out the intention of
facilitating the performance of the terms of any Loan Documents, or for
assuring the validity of any security interest.
7.13 GOVERNING LAW. The Loan shall be deemed to have been made in California,
and this Agreement and the other Loan Documents shall be governed by and
construed and enforced in accordance with the Laws of the State of
California.
7.14 SEVERABILITY OF PROVISIONS. If any provision of this Agreement or of any
of the other Loan Documents is held to be inoperative, unenforceable or
invalid, such provision shall be inoperative, unenforceable or invalid
without affecting the remaining provisions: this Agreement and the other
Loan Documents shall be construed and enforced as if such illegal, invalid
or unenforceable provision had never comprised a part of this Agreement or
the other Loan Documents; and to this end the provisions of this Agreement
and the other Loan Documents are declared to be severable, remaining in
full force and effect.
7.15 CONSTRUCTION. Whenever the context of this Agreement requires, the
singular shall include the plural and the masculine gender shall include
the feminine and/or neuter.
7.16 HEADINGS. Paragraph and Section headings in this agreement are included
for convenience of reference only and are not part of this Agreement for
any other purpose.
7.17 WAIVER OF JURY TRIAL. Borrower and Lender acknowledged that the right to
trial by Jury is a constitutional one, but that it may be waived. Each
party, after consulting (or having had the opportunity to consult) with
Counsel of their choice, knowingly and voluntarily, and for their mutual
benefit, waives any right of trial by jury in the event of litigation
regarding the performance or enforcement of, or in any way related to, this
Agreement or the obligations or any Loan Document.
Page 18 of 19
<PAGE> 28
IN WITNESS WHEREOF, Borrower and Lender have hereto caused this Agreement to be
executed on the date first above written.
"LENDER"
TOKAI BANK OF CALIFORNIA
a California banking corporation
By: /s/ MARGARET MAK
------------------------------------------
Margaret Mak, Vice President/Credit Officer
LA Commercial Banking Division
By: /s/ STEPHEN MOYER
------------------------------------------
Stephen Moyer, Vice President/Counsel
Loan Servicing Department
"BORROWER"
ESS TECHNOLOGY, INC.
By: /s/ FRED S.L. CHAN
------------------------------------------
Fred S.L. Chan,
Chairman/President/Chief Executive Officer
Page 19 of 19
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