<PAGE> 1
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 June 30, 1997.
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 June 30, 1997, the registrant had 40,328,048 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 - June 30, 1997 3
and December 31, 1996, unaudited
Condensed Consolidated Statements of Operations - three
months and six months ended June 30, 1997 and
1996, unaudited 4
Condensed Consolidated Statements of Cash Flows - six
months ended June 30, 1997 and 1996, unaudited 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II. OTHER INFORMATION
Item 2. Changes in Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ESS TECHNOLOGY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
June 30, Dec. 31,
1997 1996
---- ----
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 61,700 $ 49,055
Short-term investments 5,740 20,149
Accounts receivable, net 34,306 22,054
Inventories 29,343 33,150
Deferred income taxes 3,270 3,270
Prepaid expenses and other assets 5,896 6,338
-------- --------
Total current assets 140,255 134,016
Property and equipment, net 23,810 22,366
Other assets 68,653 55,603
-------- --------
$232,718 $211,985
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 28,335 $ 29,504
Advances payable to vendors 15,960 28,929
Income taxes payable 274 4,964
Deferred income taxes 10,617 5,412
-------- --------
Total current liabilities 55,186 68,809
-------- --------
Commitments and contingencies (See Note 4)
Shareholders' equity:
Preferred stock, no par value, 10,000 shares authorized;
none issued and outstanding -- --
Common stock, no par value, 100,000 shares authorized;
40,328 and 38,127 shares issued and outstanding 133,557 98,655
Retained earnings 43,975 44,521
-------- --------
Total shareholders' equity 177,532 143,176
-------- --------
$232,718 $211,985
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE> 4
ESS TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
-------------------------- --------------------------
June 30, June 30, June 30, June 30,
1997 1996 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net revenues $ 45,142 $ 48,450 $ 126,610 $ 89,638
Cost of revenues 27,220 21,889 68,992 39,526
--------- --------- --------- ---------
Gross profit 17,922 26,561 57,618 50,112
Operating expenses:
Research and development 7,057 4,551 12,628 8,182
Research and development in-process 22,200 -- 22,200 30,355
Selling, general and administrative 5,560 3,253 11,172 6,188
--------- --------- --------- ---------
Operating income (loss) (16,895) 18,757 11,618 5,387
Nonoperating income, net 806 640 1,446 1,339
--------- --------- --------- ---------
Income (loss) before provision for income taxes (16,089) 19,397 13,064 6,726
Provision for income taxes 2,284 7,565 13,610 14,815
--------- --------- --------- ---------
Net income (loss) $ (18,373) $ 11,832 $ (546) $ (8,089)
========= ========= ========= =========
Net income (loss) per share $ (0.47) $ 0.28 $ (0.01) $ (0.22)
========= ========= ========= =========
Weighted average common and
common equivalent shares 38,990 42,414 38,559 37,463
========= ========= ========= =========
</TABLE>
See notes to condensed consolidated financial statements
4
<PAGE> 5
ESS TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
-----------------------------
JUNE 30, 1997 JUNE 30, 1996
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (546) $ (8,089)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 2,590 1,201
Charges for research and development in-process 22,200 30,355
Compensation related to stock options -- 30
Change in assets and liabilities (net of
effects of acquisitions):
Accounts receivable (12,238) (9,756)
Inventories 3,904 (4,367)
Prepaid expenses and other assets 447 (1,140)
Accounts payable and accrued expenses (14,922) (4,889)
Income taxes payable (4,690) (1,493)
-------- --------
Net cash provided by (used in)
operating activities (3,255) 1,852
-------- --------
Cash flows from investing activities:
Acquisition of property and equipment (3,237) (6,672)
Sale of marketable equity securities and
short-term investments 15,429 1,965
Purchase of marketable equity securities and
short-term investments (1,020) (10,376)
Payments associated with capacity commitments -- (12,600)
Cash received from (paid for) acquisitions 2,529 (9,288)
-------- --------
Net cash provided by (used in)
investing activities 13,701 (36,971)
-------- --------
Cash flows from financing activities:
Issuance of common stock 2,199 2,071
-------- --------
Net cash provided by financing
activities 2,199 2,071
-------- --------
Net increase (decrease) in cash and cash equivalents 12,645 (33,048)
Cash and cash equivalents at beginning of period 49,055 51,881
-------- --------
Cash and cash equivalents at end of period $ 61,700 $ 18,833
======== ========
Supplemental disclosures of cash flow information:
Common stock issued for acquisitions $ 32,703 $ 23,352
======== ========
Income taxes $ 18,300 $ 13,001
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
5
<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, 1996 and 1995, 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 any other period or for the fiscal year
which ends December 31, 1997.
Cash and Cash Equivalents and Short-Term Investments.
The Company considers all highly liquid investments with an initial maturity
of 90 days or less to be cash equivalents and investments with original maturity
dates of greater than 90 days to be short-term investments. The Company accounts
for its short-term investments under Financial Accounting Standard No. 115
"Accounting for Certain Investments in Debt or Equity Securities" (SFAS 115),
which requires investment securities to be classified as either held to
maturity, trading or available for sale.
All of the Company's short-term investments, comprising primarily debt
instruments with contractual maturities of less than two years and marketable
equity securities have been classified as available for sale and therefore are
reported at fair value with unrealized gains and losses presented as a separate
component of shareholders' equity. Management determines the appropriate
classification of securities at the time of purchase and reevaluates the
classification at each reporting date. Interest income is accrued as earned. At
June 30, 1997 the fair value of the Company's investments approximated cost.
Revenue Recognition
Revenue from products sales is recognized at the time of shipment except for
certain shipments to distributors with right of return and allowance 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.
NOTE 2. BALANCE SHEET COMPONENTS (IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, 1997 DEC. 31, 1996
------------- -------------
<S> <C> <C>
Inventories:
Raw materials $ 2,416 $ 2,192
Work-in-process 16,581 14,302
Finished goods 12,487 18,797
-------- --------
31,484 35,291
Less: inventory reserves (2,141) (2,141)
-------- --------
$ 29,343 $ 33,150
</TABLE>
NOTE 3. 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.
6
<PAGE> 7
Under the TSMC agreement, in exchange for TSMC's increased wafer capacity
commitments, the Company agreed to pay approximately $32 million over the next
two years as deposits for wafers through 1999. The cash requirements associated
with this agreement are two $16 million payments due on June 30, 1996 and 1997.
The Company issued two promissory notes totaling $32 million securing these
payments. The Company paid the first $16 million installment by making payments
of $12.6 million and $3.4 million on June 28th and July 1, 1996, respectively.
Subsequent to the end of the second quarter of 1997, the Company paid the second
installment of $16 million. If the Company is not able to use, assign, or sell
the additional wafer quantities, a portion of the deposits may be forfeited.
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 agreed to invest approximately $26.4 million in three
installments over the projected eighteen-month period required to build the
facility. The Company made the first installment payment of $6.9 million in the
first quarter of 1996 and the second installment payment of $13.0 million in the
first quarter of 1997. The third installment of approximately $6.5 million will
be due upon a minimum of four months prior written notice. Under the terms of
the agreement, the Company will receive a 5% equity ownership in the joint
venture company and certain capacity rights. The new fabrication facility is
currently projected to commence production in 1997.
NOTE 4. ACQUISITIONS AND RELATED CHARGES
On June 11, 1997, the Company acquired Platform Technologies, Inc.
("Platform"), a developer of multimedia subsystems for 2.54 million shares of
the Company's common stock including 954,346 options with a value of $32.7
million. The acquisition which was accounted for as a purchase resulted in a
one-time charge in the second quarter of $22.2 million for in-process research
and development expenses.
NOTE 5. STOCK REPURCHASE PROGRAM
On April 29, 1997, the Company's board of directors authorized the repurchase
of up to two million of the Company's common shares at market prices and as
market and business conditions warrants. Such repurchases will be made at
management's discretion. At June 30, 1997, the Company had not repurchased
shares.
NOTE 6. RECENT ACCOUNTING PRONOUNCEMENT
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings per Share."
This statement redefines earnings per share under generally accepted accounting
principles. Under the new standard, primary earnings per share is replaced by
basic earnings per share and fully diluted earnings per share is replaced by
diluted earnings per share. The Company is required to adopt the new standard in
the fourth calendar quarter of 1997. The following table sets forth primary
earnings per share as reported and unaudited pro forma basic and diluted
earnings per share assuming SFAS 128 had been applied during the periods
presented:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1997 JUNE 30, 1996 JUNE 30, 1997 JUNE 30, 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Primary earnings per share as reported $ (0.47) $ 0.28 $ (0.01) $ (0.22)
Pro forma basic net income per share (0.47) 0.31 (0.01) (0.22)
Pro forma diluted net income per share (0.47) 0.28 (0.01) (0.22)
</TABLE>
7
<PAGE> 8
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 statements. 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 PC multimedia capabilities for
notebook and desktop computers, as well as consumer electronic products; the
Company's ability to take advantage of new markets; increased competition and
pricing pressures, general economic conditions and 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; 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, 1996 and 1995,
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 SIX MONTHS ENDED
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1997 1996 1997 1996
----- ----- ----- -----
<S> <C> <C> <C> <C>
Net revenues 100.0% 100.0% 100.0 % 100.0%
Cost of revenues 60.3 45.2 54.5 44.1
----- ----- ----- -----
Gross margin 39.7 54.8 45.5 55.9
Operating expenses:
Research and development 15.6 9.4 10.0 9.1
Research and development in-process 49.2 -- 17.5 33.9
Selling, general and administrative 12.3 6.7 8.8 6.9
----- ----- ----- -----
Operating income (loss) (37.4) 38.7 9.2 6.0
Nonoperating income, net 1.8 1.3 1.1 1.5
----- ----- ----- -----
Income (loss) before provision for income taxes (35.6) 40.0 10.3 7.5
Provision for income taxes 5.1 15.6 10.7 16.5
----- ----- ----- -----
Net income (loss) (40.7)% 24.4% (0.4)% (9.0)%
===== ===== ===== =====
</TABLE>
Net Revenues. The Company's net revenues decreased from $48.5 million in the
second quarter of 1996 to $45.1 million in the second quarter of 1997. Net
revenues for the second quarter 1997 decreased 7% from 1996 as a result of slow
seasonal demand and intense price competition. Revenues were reduced by the
Company's decision to defer revenue recognition to distributors who resell into
the China Market. International revenues accounted for substantially all of the
Company's net revenues in the second quarter of 1997 and 1996. International
revenues include shipments to foreign locations of multinational U.S. based
companies.
The Company's net revenues increased from $89.6 million in the first six
months of 1996 to $126.6 million reported in the first six months of 1997. Net
revenues increased primarily due to increase in unit shipments of the Company's
existing PC audio products and sales of new PC audio and video semiconductor
products. International revenues accounted for substantially all of the
Company's net revenues in the first six months of 1997 and 1996.
Gross Profit. The Company's gross profit decreased from $26.6 million in the
second quarter of 1996 to $17.9 million in the second quarter of 1997. The
decrease in gross profit in the second quarter of 1997 as compared to the same
period in 1996 was primarily the result of lower average selling prices ("ASPs")
on existing products arising from highly competitive market conditions.
The Company's gross profit increased from $50.1 million in the first six
months of 1996 to $57.6 million in the first six months of 1997. The increase in
gross profit in the first six months of 1997 as compared to the same period in
1996 was primarily the result of the increase in unit shipments of the Company's
PC audio and video semiconductor products. Gross margin declined in comparison
to the prior period as a result of lower ASPs on existing products arising from
highly competitive market conditions.
8
<PAGE> 9
The Company's overall gross margin is subject to change due to various
factors, including among others, competitive product pricing, yields, wafer
costs, assembly costs and product mix. The Company has encountered increased
competition from other suppliers who are offering competitive single chip
products. In addition, the Company expects that overall ASPs 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 maintain or increase gross profit, it must achieve
higher unit volume shipments, cost reductions, new features and new product
introductions. However, no assurance can be given that the Company will be able
to ship higher volumes, reduce costs, add new features or introduce new products
that gain market acceptance.
Research and Development. Research and development expenses were $7.1 million
and $12.6 million in the second quarter and first six months of 1997,
respectively, compared to $4.6 million and $8.2 million in the second quarter
and first six months of 1996, respectively. Research and development exclude 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 in the second
quarter of 1997, and $30.4 million related to acquired research and
development in-process from the acquisition of VideoCare Technology, Inc. and
OSEE Corporation in the first quarter of 1996. The increase in absolute dollars
was primarily due to the increase in the Company's engineering staff,
engineering test runs, masks, internal and external consulting expenses
associated with increased research and development efforts to support the
introduction of new PC audio and multimedia products.
Selling, General and Administrative. Selling, general and administrative
expenses were $5.6 million and $11.2 million in the second quarter and first six
months of 1997, respectively, compared to $3.3 million and $6.2 million in the
second quarter and first six months of 1996. The increase in absolute dollars
was primarily due to added personnel and related expenses and, to a lesser
extent, promotional expenses and costs associated with the expansion of the
Company's sales activities.
Non-Operating Income, Net. Non-operating income, net was $806,000 and $1.4
million in the second quarter and first six months of 1997 compared to $640,000
and $1.3 million in the second quarter of 1996. Non-operating income, net
consisted of interest income and gains on sale of securities net of interest
expense.
Provision for Income Taxes. For the second quarter of 1997, the Company
recorded a tax provision of $2.3 million despite the pre-tax loss because the
$22.2 million charge for research and development in-process was not deductible.
Excluding the one-time pre and post-tax charge of $22.2 million related to
acquired research and development in-process from the acquisition of Platform,
the Company's pro forma tax rate was 37.4% for the second quarter of 1997.
Excluding the one time pre and post-tax charge, the pro forma tax rate for the
first six months of 1997 would be lower than the combined federal and state
statutory rates as a result of tax exempt interest income and research and
development credits.
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 June 30, 1997, ESS had cash and cash
equivalents and short-term investments of $67.4 million and working capital of
$85.1 million. As of June 30, 1997, the Company had two bank lines of credit.
One line of credit is for $20 million and will expire on May 31, 1999. The
second line of credit is for $10 million and will expire on June 10, 1998. These
lines of credit require the Company to achieve certain financial ratios and
operating results. There were no borrowings under these lines of credit as of
June 30, 1997.
In the first six months of 1997, the Company generated cash of $24.2 million
from operating activities consisting of net income of $21.6 million and
depreciation and amortization of $2.6 million after excluding a one-time pre-tax
charge of $22.2 million related to the acquired research and development
in-process from the acquisition of Platform. The Company received net proceeds
of $14.4 million from sale of marketable equity securities, $2.2 million from
issuance of common stock from exercise of stock options and employee stock
purchase plan. Approximately $27.5 million was used to finance working capital,
primarily due to increases in accounts receivable reflecting a growth in sales
and a higher percentage of customers having credit terms compared to customers
on letter of credit, coupled with a decrease in inventory, accounts payable and
accrued liabilities. $3.2 million was used to purchase property, plant and
equipment. Additionally, the Company received $2.5 million on the acquisition of
Platform.
The Company believes that its existing cash and cash equivalents as of June
30, 1997, together with the cash generated from operations and available
borrowings under its line of credit, will be sufficient to fund acquisitions of
property and equipment and
9
<PAGE> 10
provide adequate working capital through at least the next twelve months.
Capital expenditures for the next twelve months are anticipated to be
approximately $20.0 million of which approximately $10.0 million will be used to
fund construction of additional facilities and approximately $10.0 million will
be used to acquire capital equipment. In addition, the Company subsequent to the
end of the second quarter paid $16.0 million to TSMC in exchange for certain
wafer capacity commitments. The Company also may invest approximately $6.5
million upon a minimum of 4 months prior written notice in exchange for an
equity ownership in a joint venture with UMC to build a new foundry and for
certain wafer capacity commitments. In addition, on April 29, 1997, the
Company's board of directors authorized the repurchase of up to two million of
the Company's common shares at market prices and as market and business
conditions warrants. Such repurchases will be made at management's discretion.
At June 30, 1997, the Company had not repurchased shares. The Company may also
utilize cash to acquire or invest in complementary businesses or products or to
obtain the right to use complementary technologies. 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. The Company also has bank lines of credit which may be utilized to
provide additional cash.
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.
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 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, particularly the PC market, 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, as well as a number of smaller
and
10
<PAGE> 11
emerging companies. The Company's principal competitors include C-Cube, Cirrus
Logic, Creative Technology, LSI Logic, Lucent, Oak Technology, OPTi, Rockwell,
SGS Thompson, Texas Instruments, Winbond and Yamaha. 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 has provided increased
performance, which could in the future result in a microprocessor 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. There
can be no assurance that the increased capabilities of microprocessors will not
adversely affect demand for the Company's products.
Dependence on Single Product Line and PC Industry. In the second quarter of
1997, sales of PC audio semiconductors accounted for a substantial majority of
the Company's net revenues, and the Company expects that sales of audio
semiconductors will continue to account for a majority of its net revenues for
the foreseeable future. Any reduction in ASPs for audio products or demand for
the Company's audio semiconductors, whether because of a reduction in demand for
PCs in general or PC audio, 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 products as well as new multimedia products for the PC and consumer
markets that provide capabilities such as video and fax/modem/voice
applications. 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 multimedia desktop and
notebook computers. ESS audio semiconductors are incorporated into motherboards
by multimedia PC original equipment manufacturers ("OEMs") or in add-in sound
cards. Therefore, the Company is heavily dependent on the continued growth of
the markets for multimedia desktop and notebook computers and multimedia
applications utilizing high quality audio. There can be no assurance that these
markets will be able to sustain continued growth. A slowing in unit volume and a
decrease in ASPs could result in a decline in revenues in the PC industry which
could result in a corresponding decline in demand for the Company's products,
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 desktop and notebook computer manufacturers, the
Company must anticipate market trends and performance and functionality
requirements of such manufacturers and must successfully develop and manufacture
products that meet 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 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. The Company is currently engaged in the development of new
PC audio products as well as new multimedia products that provide telephony
capabilities such as fax/modem/voice and video applications. There can be no
assurance that the Company will be able to
11
<PAGE> 12
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 operation.
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 Taiwan Semiconductor
Manufacturing Company, Ltd. ("TSMC"), which has manufactured certain of the
Company's products since 1989. The Company also has foundry arrangements with
Sharp Corporation ("Sharp"), IC Works ("ICW") and United Microelectronics
Corporation ("UMC"), which have been manufacturing certain of the Company's
products since 1986, 1991 and 1995, respectively. TSMC, in particular, provides
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, with the exception of TSMC, 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. Subsequent to the end of the second quarter of 1997,
the Company paid approximately $16 million to TSMC in exchange for certain wafer
capacity commitments. If the Company is not able to use, assign, or sell the
additional wafer quantities, a portion of the deposits may be forfeited. In
addition, the Company may invest approximately $6.5 million in one installment
upon four months prior written notice in exchange for an equity ownership in a
joint venture with UMC to build a new foundry and for certain wafer capacity
commitments.
While the Company has entered into long-term agreements with two of its
foundries, the Company's reliance on these and other 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 below. The Company expects to rely
upon TSMC and UMC to manufacture a substantial majority 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, particularly at the levels that the Company
currently expects TSMC and UMC to provide. 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.
All of the Company's semiconductor products are assembled and tested by
third-party vendors, primarily Amkor ANAM in Korea, Advanced Semiconductor
Engineering in Taiwan, ASAT in Hong Kong, Astra Microtronics in Indonesia and
OSE in Taiwan. The Company has internally designed and developed its own test
software and certain test equipment which is provided to the Company's test
vendors. Shortages of raw materials or disruptions in the provision of services
by the Company's assembly vendors could lead to supply constraints or delays in
the delivery of the Company's products. Such constraints or delays might result
in the loss of customers, limitations or delays in the delivery of the Company's
revenues or other material adverse effects on the Company's business, financial
conditions and results of operations. The Company's reliance on third-party
assembly and testing vendors involves a number of other risks, including reduced
control over delivery schedules, quality assurance and costs. The inability of
such third parties to deliver products of acceptable quality and in a timely
manner could have a material adverse effect on the Company's business, financial
condition and results of operations.
Customer Concentration. A limited number of customers have accounted for a
substantial portion of the Company's net revenues. The Company has expanded its
distribution activities to better address the China market. Sales to
distributors are generally subject to agreements allowing limited rights of
return and price protection with respect to unsold products. While the Company
has not
12
<PAGE> 13
experienced returns and allowances in excess of the Company's reserves, returns
and allowances in excess of reserves could have a material adverse impact on the
Company's business, financial condition and results of operation. In addition,
the Company has decided to defer revenue recognition to distributors who resell
into the China market. 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. For example,
Compaq has been a significant customer of the Company since 1995. 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
operation. 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. 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, expense and inventory levels could be disproportionately
high and the Company's business, financial condition and results of operations
could be materially adversely affected.
Management Growth. The Company has recently experienced significant growth in
revenues 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 continue to improve its operational,
financial and management information systems, implement additional systems and
controls, and hire, train, motivate, manage and retain its employees. 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.
International Operations. In the second quarter of 1997, international sales,
accounted for substantially all of the Company's net revenues. Substantially all
of the Company's international sales were to customers in Taiwan, Hong Kong,
Japan and Singapore. 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 Untied 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. In
particular, Hong Kong, which represents a large market for the Company's
products, has recently been returned to mainland China. Should the transition
result in instability in Hong Kong, it is possible that sales to Hong Kong could
be affected. Such instability could also lead to disruption in the Company's
ability to trade with Taiwan, which represents a large portion of the Company's
sales and is the location of its major foundries and two test facilities. Should
such disruption occur, it is possible that purchases by Taiwanese customers will
decline and semiconductor manufacturing in Taiwan will be impeded, cutting off
the Company's main supply of guaranteed wafer production. This could lead to
capacity constraints at non-Taiwanese foundries. 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, other than its foundry arrangement with
Sharp Corporation, provide for pricing and payment in U.S. dollars. To date,
although the effect of currency fluctuations have been insignificant, there can
be no assurance that fluctuations in currency exchange rates will not have a
material adverse effect on the Company's business, financial condition and
results of operations. In addition, 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
13
<PAGE> 14
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. Although
the semiconductor industry in recent periods has experienced increased demand,
it is uncertain how long these conditions will continue. The Company may
experience substantial period-to-period fluctuations in operating results due to
general semiconductor industry conditions.
Patents and 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 June 30, 1997, the
Company had 10 patents granted in the United States, which expire over time,
commencing in 1997 and ending in 2013, and 9 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 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. 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, copyrights 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. There is 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
noninfringing 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 crosslicensing 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.
14
<PAGE> 15
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
President, Chief Executive Officer and Chairman of the Board of Directors. As of
June 30, 1997, 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 beneficial owned, in the aggregate, approximately 39% of the
Company's Common Stock. The 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. Recently, the
Company has hired a number of key executives and management personnel. 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 June 30, 1997, Fred S.L. Chan, the
Company's President, 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 other shareholders related to Mr. and Mrs. Chan owned, in the
aggregate, approximately 39% 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
acquiror from making a tender offer or otherwise attempting to obtain control of
the Company.
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 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.
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
In connection with the acquisition by the Company (the "Merger") of
Platform Technologies, Inc. ("Platform"), the Company issued a total of
1,585,642 million shares of Common Stock which were not registered under the
Securities Act of 1933, as amended, (the "Securities Act") to the shareholders
of Platform in exchange for all of the outstanding shares of Platform capital
stock and reserved a total of 954,346 shares of ESS Common Stock to be issuable
under outstanding options reserved or issued under Platform's employee and
director stock option plans assumed by ESS in the Merger. The Company relied on
an exemption from registration for the shares of Common Stock of ESS issued in
connection with the Merger provided by Rule 4(2) of the Securities Act based on
representations by the Platform shareholders that they were given adequate
access to information about the Company and were acquiring the shares for
investment only and not with a view to or for sale in connection with any
distribution thereof. The appropriate legends were affixed to the securities
issued in the Merger.
ESS has granted the holders of the shares of ESS Common Stock issued in
the Merger certain registration rights for a period of one year following the
Effective Time, and agreed to file a Registration Statement on Form S-8 to
cover the shares of ESS Common Stock issuable upon exercise of the Platform
Options assumed in the Merger.
15
<PAGE> 16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Shareholders of ESS Technology, Inc. was held on
May 27, 1997 in Santa Clara, California. Of the total of 38,608,918 shares
outstanding as of the record date, 33,638,365 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:
Votes Votes
For Withheld
----- --------
Fred S.L. Chan 33,075,810 562,555
Annie M.H. Chan 31,478,810 2,160,352
Michael A. Aymar 33,076,310 562,055
Peter T. Mok 33,073,960 564,405
Ilbok Lee 33,073,660 564,705
The shareholders approved the adoption of the 1997 Equity Incentive Plan
and the reservation of 3,000,000 shares for the issuance thereunder. The
proposal received 18,571,208 affirmative votes, 7,656,337 negative votes,
44,521 abstentions, and 7,366,299 broker non-votes.
The shareholders ratified the appointment of Price Waterhouse LLP as the
Company's independent accountants for the year ending December 31, 1997. The
proposal received 33,291,059 affirmative votes, 21,376 negative votes, 325,930
abstentions, and zero broker non-votes.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
2.03 -- First Amended and Restated Agreement and Plan of Reorganization
dated as of April 27, 1997 among Registrant, EP Acquisition
Corporation and Platform Technologies, Inc.(1)
10.30 -- 1997 Equity Incentive Plan and related agreements(2)
27.01 -- Financial Data schedule
- -----
(1) Incorporated by reference to Exhibit 2.1 to the Registrant's current report
on Form 8-K, filed on June 24, 1997.
(2) Incorporated by reference to Appendix I filed in the Registrant's Proxy
Statement for the 1997 Annual Meeting of Shareholders, filed on April 30,
1997.
(b) Reports on Form 8-K. The Company filed a report on Form 8-K dated June
24, 1997 reporting under Item 2 thereof the acquisition of Platform
Technologies, Inc.
16
<PAGE> 17
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: August 14, 1997 By: /s/ FRED S.L. CHAN
-------------------------
Fred S.L. Chan
President, Chief Executive Officer
and Chairman of the Board
Date: August 14, 1997 By: /s/ JOHN H. BARNET
-------------------------
John H. Barnet
Vice President,
Chief Financial Officer and Secretary
Date: August 14, 1997 By: /s/ HOWARD N. HIDESHIMA
-------------------------
Howard N. Hideshima
Controller and Principal Accounting Officer
17
<PAGE> 18
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
------- -----------
2.03 -- First Amended and Restated Agreement and Plan of Reorganization
dated as of April 27, 1997 among Registrant, EP Acquisition
Corporation and Platform Technologies, Inc.(1)
10.30 -- 1997 Equity Incentive Plan and related agreements(2)
27.01 -- Financial Data schedule
- -----
(1) Incorporated by reference to Exhibit 2.1 to the Registrant's current report
on Form 8-K, filed on June 24, 1997.
(2) Incorporated by reference to Appendix I filed in the Registrant's Proxy
Statement for the 1997 Annual Meeting of Shareholders, filed on April 30,
1997.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> APR-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 61,700
<SECURITIES> 5,740
<RECEIVABLES> 34,792
<ALLOWANCES> 486
<INVENTORY> 29,343
<CURRENT-ASSETS> 140,255
<PP&E> 30,700
<DEPRECIATION> 6,890
<TOTAL-ASSETS> 232,718
<CURRENT-LIABILITIES> 55,186
<BONDS> 0
0
0
<COMMON> 133,557
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 232,718
<SALES> 45,142
<TOTAL-REVENUES> 45,142
<CGS> 27,220
<TOTAL-COSTS> 27,220
<OTHER-EXPENSES> 34,817
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (806)
<INCOME-PRETAX> (16,089)
<INCOME-TAX> 2,284
<INCOME-CONTINUING> (18,373)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (18,373)
<EPS-PRIMARY> (0.47)
<EPS-DILUTED> (0.47)
</TABLE>
