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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 June 30, 1999.
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 July 23, 1999, the registrant had 40,323,722 shares of common stock
outstanding.
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ESS TECHNOLOGY, INC.
TABLE OF CONTENTS
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PAGE
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets - June 30, 1999, unaudited and December 31, 1998, audited 3
Condensed Consolidated Statements of Operations - three and six months ended
June 30, 1999 and 1998, unaudited 4
Condensed Consolidated Statements of Cash Flows - six months ended
June 30, 1999 and 1998, unaudited 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ESS TECHNOLOGY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
JUN. 30, DEC. 31,
1999 1998
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ASSETS
Current assets:
Cash and cash equivalents ...................................... $ 68,550 $ 65,752
Short-term investments ......................................... 37,482 16,719
Accounts receivable, net ....................................... 31,025 37,830
Inventories .................................................... 34,426 22,882
Deferred income taxes .......................................... 6,372 6,372
Prepaid expenses and other assets .............................. 2,451 4,142
-------- --------
Total current assets ......................................... 180,306 153,697
Property and equipment, net ...................................... 36,724 38,000
Other assets ..................................................... 14,988 22,948
-------- --------
$232,018 $214,645
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses .......................... $ 56,600 $ 57,930
Income taxes payable and deferred income taxes ................. 16,637 14,643
-------- --------
Total current liabilities .................................... 73,237 72,573
-------- --------
Commitments and Contingencies (Note 5)
Shareholders' equity:
Preferred stock, no par value, 10,000 shares authorized;
none issued and outstanding ................................. -- --
Common stock, no par value, 100,000 shares authorized;
40,318 and 40,849 shares issued and outstanding,
respectively ................................................ 135,353 137,312
Retained earnings .............................................. 23,428 4,760
-------- --------
Total shareholders' equity ................................... 158,781 142,072
-------- --------
Total liabilities and shareholders' equity ............. $232,018 $214,645
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
3
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ESS TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(in thousands, except per share data)
<TABLE>
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THREE MONTHS ENDED SIX MONTHS ENDED
------------------------------- ----------------------------------
JUN. 30, 1999 JUN. 30, 1998 JUN. 30, 1999 JUN. 30, 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net revenues .......................................... $ 67,228 $ 34,835 $146,523 $ 87,711
Cost of revenues ...................................... 40,873 33,262 88,920 82,408
-------- -------- -------- --------
Gross profit ...................................... 26,355 1,573 57,603 5,303
Operating expenses:
Research and development .......................... 8,642 6,933 17,667 15,025
Selling, general and administrative ............... 9,523 8,632 17,969 17,661
-------- -------- -------- --------
Operating income (loss) ............................... 8,190 (13,992) 21,967 (27,383)
Nonoperating income, net .............................. 1,149 347 2,210 716
-------- -------- -------- --------
Income (loss) before provision for (benefit
from) income taxes ................................ 9,339 (13,645) 24,177 (26,667)
Provision for (benefit from) income taxes ............. 1,401 (683) 3,627 (1,352)
-------- -------- -------- --------
Net income (loss) ..................................... $ 7,938 $(12,962) $ 20,550 $(25,315)
======== ======== ======== ========
Net income (loss) per share - basic ................... $ 0.20 $ (0.32) $ 0.51 $ (0.62)
======== ======== ======== ========
Net income (loss) per share - diluted ................. $ 0.18 $ (0.32) $ 0.46 $ (0.62)
======== ======== ======== ========
Shares used in calculating net income (loss)
per share - basic ................................. 40,294 40,967 40,436 40,870
======== ======== ======== ========
Shares used in calculating net income (loss)
per share - diluted ............................... 45,133 40,967 44,934 40,870
======== ======== ======== ========
</TABLE>
See notes to condensed consolidated financial statements.
4
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ESS TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
<TABLE>
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Six Months Ended
-------------------------
June 30 June 30
1999 1998
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ................................................. 20,550 $(25,315)
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating activities:
Depreciation and amortization .................................... 8,039 6,156
Change in assets and liabilities:
Accounts receivable .............................................. 6,805 15,168
Inventories ...................................................... (11,544) 14,640
Prepaid expenses and other assets ................................ 8,211 (1,364)
Accounts payable and accrued expenses ............................ (1,330) (2,512)
Income taxes payable and deferred income taxes ................... 1,994 (739)
-------- --------
Net cash provided by operating activities ................. 32,725 6,034
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment ............................. (4,506) (8,628)
Sale of short-term investments .................................... 6,878 10,511
Sale of joint venture ............................................. 2,183 --
Purchase of short-term investments ................................ (27,641) (3,500)
Purchase of long-term investments ................................. (3,000) --
-------- --------
Net cash used in investing activities ..................... (26,086) (1,617)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repurchase of common stock ........................................ (4,228) --
Issuance of common stock .......................................... 387 795
-------- --------
Net cash provided by (used in) financing activities ....... (3,841) 795
-------- --------
Net increase in cash and cash equivalents ........................... 2,798 5,212
Cash and cash equivalents at beginning of period .................... 65,752 27,760
-------- --------
Cash and cash equivalents at end of period .......................... $ 68,550 $ 32,972
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for income taxes ........................................ $ 1,530 $ --
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
5
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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, 1998 and 1997, included in the Company's Form 10-K.
The results of operations for this interim period are not necessarily indicative
of the results that may be expected for any other period or for the fiscal year
which ends December 31, 1999.
NOTE 2. BALANCE SHEET COMPONENTS (IN THOUSANDS)
<TABLE>
<CAPTION>
JUN. 30, DEC. 31,
1999 1998
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Accounts receivable:
Accounts receivable .................................. $ 34,900 $ 41,758
Less: allowance for doubtful accounts ................ (3,875) (3,928)
-------- --------
$ 31,025 $ 37,830
======== ========
Inventories:
Raw materials ........................................ $ 7,461 $ 6,307
Work-in-process ...................................... 2,127 4,429
Finished goods ....................................... 24,838 12,146
-------- --------
$ 34,426 $ 22,882
======== ========
</TABLE>
NOTE 3. REVENUE RECOGNITION
Revenue from product 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.
NOTE 4. EARNINGS PER SHARE
Earnings per share are calculated in accordance with the provisions of
Statement of Financial Accounting Standards No. 128 "Earnings per Share" (SFAS
No. 128). SFAS No. 128 requires the Company to report both basic earnings per
share, which are based on the weighted-average number of common shares
outstanding, and diluted earnings per share, which are based on the weighted
average number of common shares outstanding and all dilutive potential common
shares outstanding.
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<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------------------------------------------
JUN. 30, 1999 JUN. 30, 1998
------------------------------------ -------------------------------------
PER PER
NET SHARE NET SHARE
INCOME SHARES AMOUNT LOSS SHARES AMOUNT
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS $ 7,938 40,294 $ 0.20 $(12,962) 40,967 $ (0.32)
Effects of Dilutive
Securities:
Stock options -- 4,839 -- --
-------- -------- -------- --------
Diluted EPS $ 7,938 45,133 $ 0.18 $(12,962) 40,967 $ (0.32)
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
-------------------------------------------------------------------------------
JUN. 30, 1999 JUN. 30, 1998
------------------------------------ -------------------------------------
PER PER
NET SHARE NET SHARE
INCOME SHARES AMOUNT LOSS SHARES AMOUNT
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS $ 20,550 40,436 $ 0.51 $(25,315) 40,870 $ (0.62)
Effects of Dilutive
Securities:
Stock options -- 4,498 -- --
-------- -------- -------- --------
Diluted EPS $ 20,550 44,934 $ 0.46 $(25,315) 40,870 $ (0.62)
======== ======== ======== ========
</TABLE>
NOTE 5. COMMITMENTS AND CONTINGENCIES
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 June 30, 1999,
$28.4 million of the payment was applied and $3.6 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 United States semiconductor companies,
to build a separate semiconductor manufacturing facility located in Taiwan at an
estimated cost of $1 billion. The Company had invested approximately $24.6
million in the joint venture. Under the terms of the agreement, the Company was
to receive a 5% equity ownership in the joint venture company and certain
capacity rights. The facility was scheduled to open during 1998, but several
fires delayed construction. UMC has stated that it expects insurance will cover
its recent fire losses at the joint venture foundry. On October 17, 1998, the
Company entered into an agreement with UMC to sell UMC approximately 63.8
million shares of the joint venture for a purchase price of $22.5 million.
Following the sale, the Company continued to hold 6 million shares of stock. On
April 8, 1999, the Company sold its remaining 6 million shares of stock of the
joint venture at book value for a purchase price of $2.2 million. The Company
received the cash on April 30, 1999.
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The Company is involved in litigation in the normal course of operations.
Management believes that the outcome of the litigation will not have a material
adverse effect on the Company's financial position or results of operations. See
Part II, Item 1. "Legal Proceedings"
NOTE 6. REPURCHASE OF COMMON STOCK
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 market and business
conditions warrant. As of June 30, 1999, the Company had repurchased
approximately 1.2 million shares at market prices ranging from $3.17 to $9.93
per share.
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 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; 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, 1998 and 1997,
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
----------------------------- ----------------------------
JUN. 30, 1999 JUN. 30, 1998 JUN. 30, 1999 JUN. 30, 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net revenues ..................................... 100.0% 100.0% 100.0% 100.0%
Cost of revenues ................................. 60.8 95.5 60.7 94.0
------ ------ ------ ------
Gross margin ................................... 39.2 4.5 39.3 6.0
Operating expenses:
Research and development ....................... 12.8 19.9 12.0 17.1
Selling, general and administrative ............ 14.2 24.8 12.3 20.1
------ ------ ------ ------
Operating income (loss) .......................... 12.2 (40.2) 15.0 (31.2)
Nonoperating income, net ......................... 1.7 1.0 1.5 0.8
------ ------ ------ ------
Income (loss) before income taxes ................ 13.9 (39.2) 16.5 (30.4)
Provision for (benefit from) income taxes ........ 2.1 (2.0) 2.5 (1.5)
------ ------ ------ ------
Net income (loss) ................................ 11.8% (37.2)% 14.0% (28.9)%
====== ====== ====== ======
</TABLE>
Net Revenues. The Company's net revenues increased 93% to $67.2 million in
the second quarter of 1999, from $34.8 million in the second quarter of 1998.
The increase in net revenues was a result of an increase in overall unit
shipments which were partially offset by a decrease in average selling prices
("ASP"). International revenues accounted for approximately 94% and 88% of the
Company's net revenues in the second quarter of 1999 and 1998, respectively.
Gross Profit. The Company's gross profit increased from $1.6 million in the
second quarter of 1998 to $26.4 million in the second quarter of 1999. The
increase in gross profit was the result of increased unit shipments of the
Company's PC audio and video semiconductor products, continued reduction of
product costs, favorable manufacturing yields and a reduction in inventory
reserves charges.
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Research and Development. Research and development expenses were $8.6
million in the second quarter of 1999, or 13% of net revenues, compared to $6.9
million, or 20% of net revenues in the second quarter of 1998. The absolute
dollar increase was primarily due to an increase in software maintenance,
payroll, mask and engineering expenses.
Selling, General and Administrative. Selling, general and administrative
expenses were $9.5 million in the second quarter of 1999, or 14% of net
revenues, compared to $8.6 million, or 25% of net revenues, in the second
quarter of 1998. The increase in absolute dollars was primarily due to an
increase in marketing and promotion expenses.
Non-Operating Income. Non-operating income was $1.1 million in the second
quarter of 1999 compared to $.3 million in the second quarter of 1998.
Non-operating income, net consisted primarily of interest income. The increase
in interest income is due to the increase in the Company's cash and short term
investment balance holdings.
Provision for (Benefit from) Income Taxes. The Company's effective tax rate
was 15% and (5%) for the second quarter of 1999 and 1998, respectively. The tax
rate for the second quarter of 1999 of 15% was lower than the combined federal
and state statutory rate of 40% as a result of the lower foreign tax rate on
earnings from the Company's foreign subsidiary that were considered to be
permanently reinvested. The effective tax rate for the second quarter 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 June 30, 1999, ESS had cash and
cash equivalents and short-term investments of $106.0 million and working
capital of $107.1 million. As of June 30, 1999, the Company had a $15.0 million
bank line of credit expiring on October 1, 2001. The line of credit requires the
Company to achieve certain financial ratios and operating results. As of June
30, 1999, the Company was in compliance with its borrowing criteria. The line of
credit was secured by land and buildings with a net book value of $23.9 million.
There were no borrowings under this line of credit as of June 30, 1999.
In the first six months of 1999, the Company generated $32.7 million in cash
from operating activities. This resulted from net income of $20.6 million,
depreciation and amortization of $8.0 million, a decrease in accounts receivable
of $6.8 million, in prepaid and other assets of $8.2 million and an increase in
income taxes payable of $2.0 million, offset in part by an increase in inventory
of $11.6 million, a decrease in accounts payable and accrued expenses of $1.3
million. The Company invested $20.8 million in net purchases of short- term
investments, $4.5 million in property and equipment, $3.0 million in purchase of
long-term investment and $4.2 million in common stock repurchases. The Company
received $2.2 million from the sale of its UICC investment and $.4 million from
the issuance of common stock.
The Company believes that its existing cash and cash equivalents as of
June 30, 1999 together with the cash generated from operations, available
borrowings under its line of credit and other financing options, will be
sufficient to fund acquisitions of property and equipment and provide adequate
working capital through at least the next twelve months. Capital expenditures
for the next twelve months are anticipated to be approximately $13.8 million,
which will be primarily used to acquire capital equipment. 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.
9
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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. In July 1999, the Company had substantially completed its Year 2000
compliance.
Year 2000 Program. The Company's Year 2000 Program is divided into four
major sections -- ESS manufactured products, internal information ("IT")
systems, non-IT systems (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 completed its review of substantially all ESS manufactured
products for Year 2000 compliance purposes. The Company believes that
substantially all of the Company's products are Year 2000 compliant.
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 it
business systems. This installation was 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 and Year 2000 compatibility of
its non-IT systems. To date, about 90 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 September 1999.
The Company has been working with its key suppliers and contract
manufacturers to assess the possible effect 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 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 adverse impact on the Company's
operations and financial results; however, the potential impact and related
costs are not known at this time.
Costs of the 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, 1999, the Company
has spent $2.7 million to implement Year 2000 compliant programs from Oracle
Corporation. The Company estimates that it may spend up to an additional
$229,000 for other replacement 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
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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 Year 2000 Program as scheduled, the
possibility of significant interruptions of normal operations should be reduced.
We are at work on the development of various types of contingency plans to
address potential problems with critical internal systems and third party
interactions. Our contingency plans include procedures for dealing with a major
disruption of internal business systems, plans for factory shutdown and
identification of alternative vendors of critical materials in the event Year
2000 related disruption in supply. Contingency planning will continue through at
least 1999, and will depend heavily on the results of remediation and testing of
critical systems. The potential ramifications of a Year 2000 type failure are
potentially far-reaching and largely unknown. We cannot assure you that a
contingency plan in effect at the time of a system failure will adequately
address the immediate or long term effects of a failure, or that such a failure
will not have a material adverse affect on the Company.
FACTORS THAT MAY AFFECT FUTURE RESULTS
This report contains certain forward-looking statements that are subject to
risk and uncertainties. For such statements, the Company desires to take
advantage of the "Safe Harbor" provisions of the Private Securities Litigation
Reform Act of 1995 and of Section 21E of and Rule 3b-6 under the Securities
Exchange Act of 1934. Such forward-looking statements include, without
limitation, statements regarding the Company's expectations, intentions or
future strategies and involve known and unknown risks, uncertainties and other
factors. All forward looking statements included in this document are based on
information available to the Company on the date hereof, and the Company assumes
no obligation to update such forward-looking statements.
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 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. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations"
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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 average selling prices ("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. See "Factors That May
Affect Future Results -- Potential Fluctuations in Operating Results."
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, PC-TEL, 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 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. See "Factors That May Affect
Future Results -- Importance of New Products and Technological Changes."
Dependence on the PC and Consumer Markets. In second quarter of 1999, sales
of PC audio semiconductor chips accounted for a majority of the Company's net
revenues, and the Company expects that sales of PC audio semiconductors will
continue to account for a significant portion of its net revenues for the
foreseeable future. In the second quarter of 1999, 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 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.
12
<PAGE> 13
The Company is currently engaged in the development and introduction of new
PC audio, video and modem semiconductor devices for the Internet, 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 Changes. 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 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 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.
13
<PAGE> 14
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 second quarter of 1999
and 1998, sales to the Company's top five customers, including sales to
distributors, accounted for approximately 57% and 52%, respectively, 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.
International Operations. During second quarter 1999 and 1998, international
sales accounted for a substantially all of the Company's net revenues. During
second quarter 1999 substantially all of the Company's international sales were
to customers in Hong Kong, Taiwan, Japan, Singapore and Peoples Republic of
China. 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.
14
<PAGE> 15
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 the second quarter of 1999, 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. Furthermore,
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 June 30, 1999, 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 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. Except for the
Lemelson Foundation complaint (See "Part 2 Item 1. Legal Proceedings"), 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
15
<PAGE> 16
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, 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, President and Chairman of the Board of Directors. 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 June 30, 1999, Fred S.L. Chan, the
Company's Chief Executive Officer, President 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 beneficially owned, in
the aggregate, 38% 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. Between April 1998 and May 1998, such
purchases had totaled $1.4 million representing 241,000 shares at prices ranging
from $5.15 to $6.56. Between June 1998 and June 1999, the Chan's refrained from
the purchase of the Company's shares in part due to the Company's repurchase
program which was completed in April 1999.
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
16
<PAGE> 17
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 interconnectedness 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign Exchange Risks. The Company funds its operations from cash generated
from its operations, the sale of marketable securities and short and long-term
debt. As the Company operates primarily in Asia, the Company is exposed to
market risk from changes in foreign exchange rates, which could affect its
results of operations and financial condition. The Company's product sales and
all of its arrangements with its foundry and test and assembly vendors are
denominated in U.S. dollars. The Company has not entered into any currency
hedging activities.
Interest Rate Risks. The Company invests in short-term investments.
Consequently, the Company is exposed to fluctuation in rates on these
investments. Increases or decreases in interest rates generally translate into
decreases and increases in the fair value of these investments. In addition, the
credit worthiness of the issuer, relative values of alternative investments, the
liquidity of the instrument and other general market conditions may affect the
fair values of interest rate sensitive investments. In order to reduce the risk
from fluctuation in rates, the Company invests in highly liquid governmental
notes and bonds with contractual maturities of less than two years. All of the
investments have been classified as available for sales and at June 30, 1999,
the fair market value of the Company's investments approximated their costs.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On February 26, 1999, the Company was named in a complaint, along with 87
other defendants, brought by the Lemelson Medical, Education & Research
Foundation (the "Lemelson Foundation") in the United States District Court for
the District of Arizona, no. Civ99-0377PHXRGS. The complaint alleges
infringement of unspecified claims in some or all of sixteen U.S. patents, and
seeks both injunctive relief and unspecified damages, with a request for damage
enhancement and attorneys' fees pursuant to 35 U.S.C. section 285. The Company
has not yet been formally served with the complaint, and has been approached by
representatives of the Lemelson Foundation suggesting that it agree to a
license. The Company is studying this proposal, and is also investigating
possible indemnification by its vendors and/or joint defense arrangements with
other defendants. Although the ultimate outcome of this matter is not currently
determinable, the Company believes, based in part on the licensing terms offered
by Lemelson Foundation, that the resolution of the matter will not have a
material adverse effect on the Company's financial position or liquidity.
However, there can be no assurance that the ultimate resolution of this matter
will not have a material adverse effect on the Company's results of operation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Shareholders of ESS Technology, Inc. was held on May
25, 1999 in Santa Clara, California. Of the total of 40,265,729 shares
outstanding as of the record date, 30,624,356 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.
17
<PAGE> 18
<TABLE>
<CAPTION>
Votes Votes
For Withheld
----- --------
<S> <C> <C>
Fred S.L. Chan 30,465,733 158,623
Annie M.H. Chan 30,460,453 163,903
Matthew Fong 30,465,269 159,087
Dominic Ng 30,467,269 157,087
Peter T. Mok 30,471,369 152,987
Ilbok Lee 30,474,369 149,987
</TABLE>
The shareholders ratified the selection of PricewaterhouseCoopers LLP as
independent accountants for the Company for the fiscal year ending December 31,
1999. The proposal received 30,486,603 affirmative votes, 94,343 negative
votes, 43,410 abstentions and 0 broker nonvotes.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
27.01 -- Financial Data schedule
(b) Reports on Form 8-K. No reports were filed on Form 8-K for the quarter
ended March 31, 1999.
18
<PAGE> 19
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 5, 1999 By: /s/ FRED S.L. CHAN
------------------------------------------
Fred S.L. Chan
President, Chief Executive Officer and
Chairman of the Board
Date: August 5, 1999 By: /s/ DALE R. LINDLY
------------------------------------------
Dale R. Lindly
Chief Financial Officer and Secretary
Date: August 5, 1999 By: /s/ HOWARD N. HIDESHIMA
------------------------------------------
Howard N. Hideshima
Vice President, Finance and
Chief Accounting Officer
19
<PAGE> 20
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
27.01 Financial Data Schedule
</TABLE>
20
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> APR-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 68,550
<SECURITIES> 37,482
<RECEIVABLES> 34,900
<ALLOWANCES> (3,875)
<INVENTORY> 34,426
<CURRENT-ASSETS> 180,306
<PP&E> 59,483
<DEPRECIATION> (22,759)
<TOTAL-ASSETS> 232,018
<CURRENT-LIABILITIES> 73,237
<BONDS> 0
0
0
<COMMON> 135,353
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 232,018
<SALES> 67,228
<TOTAL-REVENUES> 67,228
<CGS> 40,873
<TOTAL-COSTS> 40,873
<OTHER-EXPENSES> 18,165
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (1,149)
<INCOME-PRETAX> 9,339
<INCOME-TAX> 1,401
<INCOME-CONTINUING> 7,938
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,938
<EPS-BASIC> 0.20
<EPS-DILUTED> 0.18
</TABLE>
