<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934.
For the quarterly period ended June 30, 2000.
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 27, 2000, the registrant had 43,336,127 shares of common
stock outstanding.
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ESS TECHNOLOGY, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets - June 30, 2000, unaudited and December 31, 1999,
audited 3
Consolidated Statements of Operations - three and six months ended June 30,
2000 and 1999, unaudited 4
Consolidated Statements of Cash Flows - three and six months ended June 30,
2000 and 1999, unaudited 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of 10
Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 16
PART II. OTHER INFORMATION
Item 1 Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ESS TECHNOLOGY, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
JUNE 30, DEC. 31,
2000 1999
-------- --------
(UNAUDITED) (AUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .................................. $152,933 $130,913
Short-term investments ..................................... 47,608 50,618
Accounts receivable, net ................................... 46,702 34,362
Inventories ................................................ 46,132 42,347
Deferred income taxes ...................................... 10,758 10,758
Prepaid expenses and other assets .......................... 2,196 2,199
-------- --------
Total current assets ..................................... 306,329 271,197
Property, plant and equipment, net ........................... 39,117 40,564
Other assets ................................................. 12,953 9,266
-------- --------
Total assets ........................................ $358,399 $321,027
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ........................................... $ 23,511 $ 44,909
Accrued liabilities ........................................ 29,927 27,394
Income taxes payable and deferred income taxes ............. 19,547 12,285
-------- --------
Total current liabilities ................................ 72,985 84,588
-------- --------
Commitments and Contingencies (Note 5)
Minority Interest (Note 8) ................................... 78,325 52,860
-------- --------
Shareholders' equity:
Preferred stock, no par value, 10,000 shares authorized;
none issued and outstanding ............................. -- --
Common stock, no par value, 100,000 shares authorized;
43,185 and 41,372 shares issued and outstanding at
June 30, 2000 and December 31, 1999, respectively........ 146,925 140,597
Retained earnings .......................................... 60,164 42,982
-------- --------
Total shareholders' equity ............................... 207,089 183,579
-------- --------
Total liabilities and shareholders' equity ......... $358,399 $321,027
======== ========
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 4
ESS TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(in thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------------ --------------------------------
JUNE 30, 2000 JUNE 30, 1999 JUNE 30, 2000 JUNE 30, 1999
------------- ------------- -------------- --------------
<S> <C> <C> <C> <C>
Net revenues ........................................ $79,587 $67,228 $163,184 $146,523
Cost of revenues .................................... 49,296 40,873 102,410 88,920
------- ------- -------- --------
Gross profit .................................... 30,291 26,355 60,774 57,603
Operating expenses:
Research and development ........................ 12,118 8,642 22,867 17,667
In-process research and development ............. -- -- 2,625 --
Selling, general and administrative ............. 12,007 9,523 22,397 17,969
------- ------- -------- --------
Operating income .................................... 6,166 8,190 12,885 21,967
Nonoperating income, net ............................ 2,870 1,149 5,748 2,210
------- ------- -------- --------
Income before provision for income taxes ........... 9,036 9,339 18,633 24,177
Provision for income taxes .......................... 2,127 1,401 5,181 3,627
------- ------- -------- --------
Net income before minority interest ................. 6,909 7,938 13,452 20,550
Minority interest ................................... 1,582 -- 3,730 --
------- ------- -------- --------
Net income .......................................... $ 8,491 $ 7,938 $ 17,182 $ 20,550
======= ======= ======== ========
Net income per share:
Basic ........................................... $ 0.20 $ 0.20 $ 0.41 $ 0.51
======= ======= ======== ========
Diluted ......................................... $ 0.18 $ 0.18 $ 0.35 $ 0.46
======= ======= ======== ========
Shares used in calculating net income per share:
Basic ........................................... 42,374 40,294 42,089 40,436
======= ======= ======== ========
Diluted ......................................... 48,006 45,133 48,524 44,934
======= ======= ======== ========
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 5
ESS TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
----------------------------
JUNE 30, JUNE 30,
2000 1999
--------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ..................................................... $ 17,182 $ 20,550
Adjustments to reconcile net income
to net cash provided by (used in) operating activities
excluding net assets and liabilities from acquisition:
Depreciation and amortization ................................. 9,585 8,039
Charges for in-process research and development ............... 2,625 --
Minority interest loss ........................................ (3,730) --
Change in assets and liabilities:
Accounts receivable ......................................... (12,340) 6,805
Inventories ................................................. (3,785) (11,544)
Prepaid expenses and other assets ........................... (519) 8,211
Accounts payable and accrued liabilities .................... (19,536) (1,330)
Income taxes payable and deferred income taxes .............. 7,262 1,994
--------- --------
Net cash provided by (used in) operating activities .... (3,256) 32,725
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment, net excluding
capital equipment from acquisition .......................... (4,469) (4,506)
Cash paid for acquisition ...................................... (3,733) --
Sale of short-term investments ................................. 36,161 6,878
Sale of joint venture .......................................... -- 2,183
Purchase of short-term investments ............................. (33,151) (27,641)
Purchase of long-term investments .............................. (5,055) (3,000)
--------- --------
Net cash used in investing activities .................. (10,247) (26,086)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash received for minority interest ............................ 29,195 --
Repurchase of common stock ..................................... -- (4,228)
Issuance of common stock ....................................... 6,328 387
--------- --------
Net cash provided by (used in) financing activities .... 35,523 (3,841)
--------- --------
Net increase in cash and cash equivalents ........................ 22,020 2,798
Cash and cash equivalents at beginning of period ................. 130,913 65,752
--------
Cash and cash equivalents at end of period ....................... $ 152,933 $ 68,550
========= ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for income taxes ..................................... $ 1,895 $ 1,530
========= ========
</TABLE>
See notes to consolidated financial statements.
5
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ESS TECHNOLOGY, INC.
NOTES TO 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 accounting principles generally
accepted in the United States 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, 1999 and 1998, 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, 2000.
NOTE 2. BALANCE SHEET COMPONENTS (IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, DEC. 31,
2000 1999
--------- ---------
<S> <C> <C>
Cash and cash equivalents:
Cash and money market accounts -- ESS ............. $ 21,969 $ 25,867
Cash and money market accounts -- ViAlta.com ...... 1,277 992
U.S. government notes and bonds -- ESS ............ 35,363 14,419
U.S. government notes and bonds -- ViAlta.com ..... 94,197 89,508
Certificates of deposit -- ESS .................... 127 127
--------- ---------
$ 152,933 $ 130,913
========= =========
Short-term investments:
U.S. government notes and bonds -- ESS ............ $ 19,521 $ 28,274
U.S. government notes and bonds -- ViAlta.com ..... 28,087 22,344
--------- ---------
$ 47,608 $ 50,618
========= =========
Accounts receivable:
Accounts receivable ............................... $ 47,406 $ 36,821
Less: allowance for doubtful accounts ............. (704) (2,459)
--------- ---------
$ 46,702 $ 34,362
========= =========
Inventories:
Raw materials ..................................... $ 14,051 $ 10,697
Work-in-process ................................... 5,573 10,208
Finished goods .................................... 26,508 21,442
--------- ---------
$ 46,132 $ 42,347
========= =========
Accrued liabilities:
Accrued compensation costs ........................ $ 7,821 $ 7,808
Accrued commission and royalties .................. 11,389 5,695
Other accrued liabilities ......................... 10,717 13,891
--------- ---------
$ 29,927 $ 27,394
========= =========
</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.
6
<PAGE> 7
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------------------------------------------
JUNE 30, 2000 JUNE 30, 1999
--------------------------------------- ---------------------------------------
PER PER
NET SHARE NET SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS .................. $ 8,491 42,374 $ 0.20 $ 7,938 40,294 $ 0.20
Effects of Dilutive
Securities:
Stock options ............ -- 5,632 -- 4,839
--------- --------- --------- ---------
Diluted EPS ................ $ 8,491 48,006 $ 0.18 $ 7,938 45,133 $ 0.18
========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
-----------------------------------------------------------------------------------------
JUNE 30, 2000 JUNE 30, 1999
----------------------------------------- -----------------------------------------
PER PER
NET SHARE NET SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS ............... $ 17,182 42,089 $ 0.41 $ 20,550 40,436 $ 0.51
Effects of Dilutive
Securities:
Stock options ......... -- 6,435 -- 4,498
--------- --------- --------- ---------
Diluted EPS ............. $ 17,182 48,524 $ 0.35 $ 20,550 44,934 $ 0.46
========= ========= ========= =========
</TABLE>
NOTE 5. COMMITMENTS AND CONTINGENCIES
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.
NOTE 6. ACQUISITION AND RELATED CHARGES
On February 3, 2000, the Company acquired all of the outstanding shares
and vested stock options of NetRidium Communications, Inc. for $5.3 million in
cash of which 10% will be held in escrow for nine months pending the resolution
of certain contingencies. NetRidium is a development stage company which
develops broadband communication products enabling high-speed networking over
existing phone lines in the home. NetRidium has assets, liabilities and expenses
which has no material effect on the Company. The purchase price was allocated to
assets acquired and liabilities assumed based upon the book value of NetRidium's
current assets, equipment and liabilities, which management believes approximate
their fair market value and independent appraisal for all other identifiable
assets as follows:
<TABLE>
<CAPTION>
(In thousands)
<S> <C>
In-process research and development $ 2,625
Technical infrastructure 797
Covenant not to compete 730
Current assets 1,071
Capital equipment, net 75
Other long-term assets 172
Current liabilities assumed (138)
-------
Value of consideration for acquisition 5,332
-------
Less cash acquired from acquisition (1,066)
10% deferred payment (533)
-------
Business acquisition $ 3,733
=======
</TABLE>
The acquisition was recorded using the purchase method of accounting and
accordingly, the results of operations and cash flows of such acquisition have
been included from the date of acquisition. Acquired in-process research and
development aggregating $2.6 million for the NetRidium acquisition was charged
to operations in the first quarter of 2000. Technical infrastructure and
covenant not to compete will be amortized over four years. In connection with
the acquisition, the Company granted certain NetRidum employees stock options to
purchase 500,000 shares of the Company's stock at $17.68 per share, the fair
market value on the date of grant. In addition certain employees of NetRidium
have signed employment contracts which, among other things, provide that if the
employee stays with the Company for the
7
<PAGE> 8
four year term of employment agreement, the employee's stock options will have a
value of at least $8.85 more than the exercise price when this options become
exercisable. Approximately 428,000 of the options issued upon acquisition are
subject to this guarantee. During the second quarter of 2000, the Company
recorded approximately $0.2 million as compensation expense under this
guarantee. Together with the first quarter expense of $0.2 million, the Company
recorded a total of $0.4 million as compensation expenses for the first six
months of 2000.
NOTE 7. RELATED PARTY TRANSACTIONS
In January 2000, the Company and its subsidiary, ViAlta.com ("ViAlta")
entered into an Assignment of Intellectual Property Agreement whereby ViAlta
paid ESS $2.0 million for the Videophone and EnReach-based Web Browser
technologies. The Company entered into a Research and Development Service
Agreement and a General and Administrative Service Agreement with ViAlta whereby
ESS provides services to ViAlta for a fee. During the second quarter of 2000,
inter-company service fees of $1.6 million were charged to ViAlta. Including the
fees from the first quarter, ViAlta paid a total of $3.4 million for
inter-company service fees during the first six months of 2000 to ESS. ViAlta
also entered into a Purchase Agreement with the Company for the procurement of
ESS' chip-sets to be used in ViAlta set-top boxes. The amount of material
purchase was approximately $0.4 million and $0.4 million for the first quarter
and the second quarter of 2000, respectively. All inter-company transactions
were eliminated in the consolidated financial statements.
NOTE 8. VIALTA.COM
In April 1999, the Company incorporated ViAlta, a subsidiary, through
which ESS plans to introduce advanced, user-friendly products and applications
for the Internet. ViAlta is incorporated in California and headquartered in
Fremont.
In September 1999, ViAlta issued 40.0 million shares of Series A
Preferred Stock at $0.25 per share to the Company for $10 million in cash. In
October 1999, Mr. Fred Chan, Chairman of ESS and ViAlta, purchased 4 millions
shares of common stock at $0.25 per share by issuing a full recourse promissory
note due to ViAlta which bears interest at market rate. The promissory note and
the accrued interest were paid in March 2000. Also in October 1999, ViAlta
issued 400,000 and 1,820,000 common shares to the Company and certain employees,
respectively, for full recourse promissory notes in the amount of $555,000.
These notes have been fully paid in cash to ViAlta in the first quarter of 2000.
In December 1999, ViAlta issued 40.0 million shares of Series B
Preferred Stock at $2.60 per share; 20.0 million to the Company and 20.3 million
to third party investors for a total of $52.8 million in cash. On January 4,
2000, ViAlta received $20.8 million in the form of a full recourse promissory
note from Mr. Chan for the purchase of 8.0 million shares of Series B Preferred
Stock at $2.60 per share. The principal and the accrued interest of the
promissory note were paid in full in March 2000. During the first quarter of
2000, ViAlta received $7.0 million in cash from third party investors for
subscription to 2.7 million shares of its Series B Preferred Stock.
As of June 30, 2000, minority interest in the Company's consolidated
balance sheet is comprised of ViAlta Series B Preferred Stock and Common Stock
issued to third parties and contractors of ViAlta, net of net loss pertaining to
the minority interest shareholders.
As of June 30, 2000, the Company has a 62.13% voting interest in ViAlta.
According to ViAtla's Second Amended and Restated Articles of
Incorporation, ViAlta is authorized to issue two classes of stock to be
designated, respectively, "Common Stock" and "Preferred Stock".
CONVERTIBLE PREFERRED STOCK
Convertible Preferred Stock at June 30, 2000 consists of the following:
<TABLE>
<CAPTION>
PROCEEDS
SHARES NET OF
------------------------------- ISSUANCE
SERIES AUTHORIZED OUTSTANDING COSTS
-------- ------------ ------------ ------------
<S> <C> <C> <C>
A 40,000,000 40,000,000 $ 10,000,000
B 51,000,000 51,000,000 $132,600,000
------------ ------------ ------------
91,000,000 91,000,000 $142,600,000
============ ============ ============
</TABLE>
8
<PAGE> 9
NOTE 9. SEGMENT INFORMATION
The Company operates in two reportable segments: the semiconductor segment and
the Internet segment. In the semiconductor segment, the Company designs,
develops, supports and manufactures highly integrated mixed-signal
semiconductor, hardware, software and system solutions for multimedia
applications in the internet, personal computer and the consumer marketplace.
The semiconductor segment offers comprehensive solutions for audio, video and
modern applications. In the Internet segment, the Company plans to develop and
market advanced, user-friendly products and applications and content for the
Internet.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------------------------------
JUNE 30, 2000 JUNE 30, 1999
------------------------------------------------------------ ------------
ESS VIALTA ELIMINATION CONSOLIDATED CONSOLIDATED
------- -------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net revenues - external customers 79,255 332 -- 79,587 67,228
Net revenues - intersegment 358 -- (358) -- --
Operating income (loss) 12,325 (6,357) 198 6,166 8,190
Total assets 283,772 136,791 (62,164) 358,399 232,018
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
----------------------------------------------------------------------------
JUNE 30, 2000 JUNE 30, 1999
------------------------------------------------------------ ------------
ESS VIALTA ELIMINATION CONSOLIDATED CONSOLIDATED
------- -------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net revenues - external customers 161,850 1,334 -- 163,184 146,523
Net revenues - intersegment 759 -- (759) -- --
Operating income (loss) 24,690 (13,788) 1,983 12,885 21,967
Total assets 283,772 136,791 (62,164) 358,399 232,018
</TABLE>
In the second quarter of 1999, the Company operated in a single segment.
NOTE 10 REPURCHASE OF COMMON STOCK
On June 6, 2000, the Company's Board of Director authorized the repurchase of up
to two million of the Company's common shares at market prices and as market and
business conditions warrant. Such repurchases will be made at management's
discretion. As of June 30, 2000, the Company has not repurchased shares.
As of August 10, 2000, the Company purchased 287,000 shares of its common stock
at an aggregate cost of $4,838,687 as part of the stock repurchase program.
NOTE 11. SUBSEQUENT EVENTS
On July 20, 2000, the Company announced a plan to spin off its ViAlta subsidiary
following an initial public offering by ViAlta in 2001. The Company currently
holds a 62.13% ownership in ViAlta and plans to distribute its ViAlta shares to
the Company's shareholders following an initial public offering by ViAlta. The
planned transactions are subject to receiving a favorable tax ruling and other
approvals as well as market conditions.
Also in July 2000, the board of directors and the majority shareholders of
ViAlta approved the ViAlta's plan to offer and sell up to 10.0 million shares of
Series C Preferred Stock of ViAlta at a price of $2.68 per share. As of August
10, 2000, ViAlta has not completed any subscription transaction for its Series C
Preferred Stock financing.
9
<PAGE> 10
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 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, 1999 and 1998, 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, 2000 JUNE 30, 1999 JUNE 30, 2000 JUNE 30, 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net revenues .............................. 100.0% 100.0% 100.0% 100.0%
Cost of revenues .......................... 61.9 60.8 62.8 60.7
----- ----- ----- -----
Gross margin ............................ 38.1 39.2 37.2 39.3
Operating expenses:
Research and development ................ 15.2 12.8 14.0 12.0
In-process research and development ..... -- -- 1.6 --
Selling, general and administrative ..... 15.1 14.2 13.7 12.3
----- ----- ----- -----
Operating income .......................... 7.8 12.2 7.9 15.0
Nonoperating income, net .................. 3.6 1.7 3.5 1.5
----- ----- ----- -----
Income before income taxes ................ 11.4 13.9 11.4 16.5
Provision for income taxes ................ 2.7 2.1 3.2 2.5
----- ----- ----- -----
Net income before minority interest ....... 8.7 11.8 8.2 14.0
Minority interest ......................... 2.0 -- 2.3 --
----- ----- ----- -----
Net income ................................ 10.7% 11.8% 10.5% 14.0%
----- ----- ----- -----
</TABLE>
Net Revenues. The Company's net revenues increased 18% to $79.6 million
in the second quarter of 2000, from $67.2 million in the second quarter of 1999.
The increase in net revenues was a result of higher overall unit shipments,
which were partially offset by lower average selling prices ("ASP").
International revenues accounted for approximately 92% and 94% of the Company's
net revenues in the second quarter of 2000 and 1999, respectively.
Gross Profit. The Company's gross profit increased to $30.3 million in
the second quarter of 2000 from $26.4 million in the second quarter of 1999. The
increase in gross profit was the result of higher unit shipments of new products
such as DVD and communication products and a reduction in inventory reserves of
approximately $1.0 million due to sales of the related inventory.
Research and Development. Research and development expenses were $12.1
million in the second quarter of 2000, or 15% of net revenues, compared to $8.6
million, or 13% of net revenues in the second quarter of 1999. The increase in
absolute dollars was primarily due to increased expenses of $3.8 million
incurred by the Company's majority owned subsidiary, ViAlta.
Selling, General and Administrative. Selling, general and administrative
expenses were $12.0 million in the second quarter of 2000, or 15% of net
revenues, compared to $9.5 million, or 14% of net revenues, in the second
quarter of 1999. The increase in absolute dollars was primarily due to increased
expenses of $2.3 million incurred by ViAlta.
Nonoperating Income, Net. Nonoperating income, net was $2.9 million in
the second quarter of 2000 compared to $1.1 million in the second quarter of
1999. Nonoperating income, net consisted primarily of interest income. The
increase in interest income was due to the increase in the Company's and
ViAlta's cash, cash equivalents and short-term investment balances.
10
<PAGE> 11
Provision for Income Taxes. The Company's effective tax rate was 17% and
15% for the second quarter of 2000 and 1999, respectively. The tax rate for the
second quarter of 2000 of 17% 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.
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, 2000, the Company had cash
and cash equivalents and short-term investments of $200.5 million of which
$123.6 million belongs to ViAlta and working capital of $233.3 million. As of
June 30, 2000, the Company had a $15.0 million bank line of credit expiring on
October 1, 2001. The line of credit requires the Company to maintain certain
financial ratios and operating results. As of June 30, 2000, 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 $21.9 million. There were no borrowings
under this line of credit as of June 30, 2000.
In the first six months of 2000, the Company used $3.3 million in cash
from operating activities. This resulted from net income of $17.2 million,
depreciation and amortization of $9.6 million, charges for in-process research
and development of $2.6 million, a minority interest net loss of $3.7 million,
and an increase in income taxes payable of $7.3 million offset in part by an
increase in accounts receivable of $12.3 million and in inventory of $3.8
million, and a decrease in accounts payable and accrued expenses of $19.5
million. The Company invested $3.7 million in a business acquisition, $5.1
million in long-term investments, $4.5 million in property and equipment offset
in part by $3.0 million received in net sales of short-term investment. ViAlta
received cash of $29.2 million from outside investors and the Company received
$6.3 million upon issuances of common stock in connection with the exercise of
employee stock options and the employee stock purchase plan.
The Company believes that its existing cash and cash equivalents as of
June 30, 2000 together with the cash generated from operations, available
borrowings under its line of credit and other financing options, will be
sufficient to fund purchases 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 $29.0 million
primarily for the purchase of capital equipment, of which $5.0 million is to be
used by ESS and $24.0 million is to be used by ViAlta. 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.
As of August 10, 2000, the Company purchased 287,000 shares of its
common stock at an aggregate cost of $4,838,687 as part of the stock repurchase
program.
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 non-cancelable 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."
Competition and Pricing Pressures. The markets in which the Company
competes are intensely competitive and are characterized by rapid technological
change, price reductions 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
11
<PAGE> 12
companies that may enter the Company's existing or future markets with products
that may be at lower costs or provide higher levels of integration, higher
performance or additional features. The Company is unable to predict the timing
and nature of any such competitive product offerings. The announcement and
commercial shipment of competitive products could adversely affect sales of the
Company's products and may result in increased price competition that would
adversely affect the ASPs and margins of the Company's products. In general,
product prices in the semiconductor industry have decreased over the life of a
particular product. The markets for most of the applications for the Company's
products are characterized by intense price competition. The willingness of
prospective customers to design the Company's products into their products
depends to a significant extent upon the ability of the Company to sell its
products at a price that is cost-effective for such customers. As the markets
for the Company's products mature and competition increases, the Company
anticipates that prices for its products will continue to decline. If the
Company is unable to reduce its costs sufficiently to offset declines in product
prices or is unable to introduce more advanced products with higher product
prices, the Company's business, financial condition and results of operations
would be materially adversely affected.
The Company's existing and potential competitors consist principally of
large domestic and international companies that have substantially greater
financial, manufacturing, technical, marketing, distribution and other
resources, greater intellectual property rights, broader product lines and
longer-standing relationships with customers than the Company. The Company's
competitors also include a number of smaller and emerging companies. The
Company's principal audio competitors include Cirrus Logic, Creative Technology
and Yamaha. The Company's principal video competitors include C-Cube
Microsystems, Winbond, LSI Logic, Zoran and SGS Thomson. The Company's principal
modem competitors include Lucent Technologies, PC-TEL, Conexant, 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 result in microprocessors capable of performing
multimedia functions. In this regard, Intel Corporation includes MMX
Instructions (Multimedia Extensions) in its current generation of
microprocessors, which improve the microprocessor's performance for graphics,
image processing, and data computation applications. Intel is promoting the
processing power of the Pentium-III processor for data and signal intensive
functions such as graphics acceleration and other multimedia functions. The
microprocessor still requires analog and mixed-signal interface chips, such as
ESS-supplied IC products, to complete a multimedia subsystem; but there can be
no assurance that the increased capabilities of microprocessors will not
adversely affect demand for the Company's products
Dependence on the PC and Consumer Markets. During the second quarter of
2000, sales of PC audio semi-conductor chips accounted for a significant portion
of the Company's net revenues, the Company expects that sales of audio
semiconductors will continue to account for a significant portion of its net
revenues for the foreseeable future. Sales of video semiconductor chips to the
video compact disk ("VCD") and digital video disk ("DVD") player market also
accounted for a significant portion of the Company's revenues during Q2 of 2000.
Any reduction in ASPs or demand for the Company's semiconductor chips, whether
because of a reduction in demand for PCs, DVD 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.
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 and DVD players. Therefore, the Company is
heavily dependent on the growth of the markets and the cost requirements for
desktop and notebook computers, and VCD and DVD 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
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<PAGE> 13
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
New Business Venture. In 1999, the Company incorporated ViAlta,
originally as a wholly-owned subsidiary of the Company, in order to develop and
market new products and applications for the Internet. The Company's investment
in ViAlta involves all of the risks normally associated with investments in
development stage companies. In order for ViAlta to begin earning revenues and
ultimately achieve profitability, it must successfully develop and market new
products and applications on a cost effective basis. There can be no assurance
that ViAlta will be able to do so, since, among other things, the Company has
limited experience in starting new business ventures and there is intense
competition in the marketplace for Internet products and applications generally.
In addition, the Company's investment in ViAlta may adversely affect the
Company's existing business, financial position and results of operations by
diverting management's attention, working capital and other resources from the
Company to the new ViAlta business venture.
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
United Microelectronics Corporation ("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 1999,
the Company secured wafer capacity that it believes will be adequate to meet its
growth plans for the next 12 months. In September 1999, Taiwan experienced a
series of earthquakes. While the Company did not experience any material effects
from these earthquakes, there can be no assurance that any future earthquakes or
other catastrophic events will not have a material adverse effect on the
Company's business, financial condition and results of operations.
While the Company has entered into 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.
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. During the second quarter
of 2000 and the second quarter of 1999, sales to the Company's top five
customers including sales to distributors, accounted for approximately 55% and
57% 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
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<PAGE> 14
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 the 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. Substantially all of the Company's
international sales were to customers in Hong Kong, Taiwan, Japan, Singapore and
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.
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. 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, 2000, the Company had 6 patents granted in the United States,
which expire over time, commencing in 2000 and ending in 2015, and 11
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
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<PAGE> 15
prevent misappropriation of its technology or that the Company's competitors
will not independently develop technologies that are substantially equivalent or
superior to the Company's technology.
The semiconductor industry is characterized by vigorous protection and
pursuit of intellectual property rights or positions, which have resulted in
significant and often protracted and expensive litigation. As of June 2000,
there was no pending intellectual property litigation against the Company.
However, the Company or its foundries may from time to time receive notice of
claims that the Company has infringed patents or other intellectual property
rights owned by others. The Company may seek licenses under such patents or
other intellectual property rights. However, there can be no assurance that
licenses will be offered or that the terms of any offered licenses will be
acceptable to the Company. The failure to obtain a license from a third party
for technology used by the Company could cause the Company to incur substantial
liabilities and to suspend the manufacture of products or the use by the
Company's foundries of processes requiring the technology. Furthermore, the
Company may initiate claims or litigation against third parties for infringement
of the Company's proprietary rights or to establish the validity of the
Company's proprietary rights. Litigation by or against the Company could result
in significant expense to the Company and divert the efforts of the Company's
technical and management personnel, whether or not such litigation results in a
favorable determination for the Company. In the event of an adverse result in
any such litigation, the Company could be required to pay substantial damages,
cease the manufacture, use and sale of infringing products, expend significant
resources to develop non-infringing technology, discontinue the use of certain
processes or obtain licenses for the infringing technology. There can be no
assurance that the Company would be successful in such development or that such
licenses would be available on reasonable terms, or at all, and any such
development or license could require expenditures by the Company of substantial
time and other resources. Although patent disputes in the semiconductor industry
have often been settled through cross-licensing arrangements, there can be no
assurance that in the event that any third party makes a successful claim
against the Company or its customers, a cross-licensing arrangement could be
reached. In such a case, if a license is not made available to the Company on
commercially reasonable terms, the Company's business, financial condition and
results of operations could be materially adversely affected.
The Company currently licenses certain of the technology utilized by the
Company in its products, and expects to continue to do so in the future. The
Company has in the past granted licenses to certain of its technology, some of
which have expired, such licenses have been limited and the Company has not
derived material revenues from such licenses in recent periods.
Dependence on Key Personnel. The Company's success depends to a
significant degree upon the continued contributions of Fred S.L. Chan, the
Company's Chairman of the Board of Directors and Robert L. Blair, the Company's
Chief Executive Officer. 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, Mr. Blair, 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, 2000, Fred S.L. Chan,
the 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, 36% 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.
Volatility of Stock Price. The price of the Company's Common Stock has
in the past and may continue in the future to fluctuate widely. Future
announcements concerning the Company, its competitors or its principal
customers, including quarterly operating results, changes in earnings estimates
by analysts, technological innovations, new product introductions, governmental
regulations or litigation may cause the market price of the Company's Common
Stock to continue to fluctuate substantially. Further, in recent years the stock
market has experienced extreme price and volume fluctuations that have
particularly affected the market prices of equity securities of many high
technology companies and that often have been unrelated or disproportionate to
the operating performance of such companies. These fluctuations, as well as
general economic, political and market conditions such as recessions or
international currency fluctuations, may materially adversely affect the market
price of the Common Stock.
Euro Conversion. The Company is in the process of addressing the issues
raised by the introduction of the Single European Currency ("Euro"). The Company
does not expect the cost of any system modifications to be material or result in
any material increase in transaction costs. The Company will continue to
evaluate the impact of the Euro; however, based on currently available
information management does not believe that the introduction of the Euro will
have a material adverse impact on the Company's financial condition or the
overall trends in results of operations.
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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. In order to reduce the
risk from fluctuation in foreign exchange rates, 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 also 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 a sale, and at June 30, 2000,
the fair market value of the Company's investments approximated their costs.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On April 27, 1999, the Company and one other defendant were named in a
complaint by Dollinger-Fremont Associates in the Superior Court of California,
County of Alameda, Case No. H206962-7. The complaint alleges breach of contract
in connection with a contract for the sale of certain property to the plaintiff
and seeks specific performance requiring the Company to convey the property, as
well as damages for lost profits, expenses arising from delay and attorney's
fees. On April 21, 2000, the parties reached a settlement of the case, which
includes the sale of the land to the plaintiff. The sale of the land will result
in a one-time gain for the Company. The parties are in the process of finalizing
the settlement agreement and expect to close escrow in the third quarter of year
2000.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Shareholders of ESS Technology, Inc. was held on
May 31, 2000 in Santa Clara, California. Of the total of 42,124,986 shares
outstanding as of the record date, 36,906,247 were present or represented by
proxies at the meeting. The table below presents the results of the election of
the Company's board of directors.
<TABLE>
<CAPTION>
NOMINEE FOR WITHHELD
---------------- ---------- -------
<S> <C> <C>
Fred S. L. Chan 36,528,133 378,114
Annie M. H. Chan 36,517,904 388,343
Matthew Fong 36,512,919 393,328
Robert Blair 36,517,560 388,687
David Lee 36,497,168 409,079
Peter T. Mok 36,533,318 372,929
Dominic Ng 35,532,818 373,429
</TABLE>
The shareholders approved amendments to the 1995 employee stock purchase
plan to increase the number of shares of common stock reserved for issuance
thereunder by 2,000,000 shares. The proposal received 20,244,875 affirmative
votes, 2,397,702 negative votes, 646,758 abstentions and 18,835,651 broker
nonvotes.
The shareholders also approved amendments to the 1997 equity incentive
plan to increase the number of shares of common stock reserved for issuance
thereunder by 2,500,000 shares. The proposal received 14,946,010 affirmative
votes, 7,689,378 negative votes, 653,947 abstentions and 18,835,651 broker
nonvotes.
The shareholders also ratified the appointment of PricewaterhouseCoopers
LLP as independent accountants of the Company for the fiscal year ending
December 31, 2000. The proposal received 36,861,036 affirmative votes, 18,078
negative votes, 27,133 abstentions and 5,218,739 broker nonvotes.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
27.01 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K. No reports were filed on Form 8-K for the
quarter ended June 30, 2000.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report on Form 10-Q to be signed on its behalf
by the undersigned, thereunto duly authorized.
ESS TECHNOLOGY, INC. (Registrant)
Date: August 11, 2000 By: /s/ Robert L. Blair
------------------------------------
Robert L. Blair
President, Chief Executive Officer
and Chief Accounting Officer
Date: August 11, 2000 By: /s/ Matt Fong
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Matt Fong
Chief Financial Officer and Secretary
17
<PAGE> 18
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
27.01 Financial Data Schedule
</TABLE>
18
