Ess Technology, Inc. Business Information, Profile, and History

Company Perspectives:

Sound is one of the most critical elements of the multimedia experience. Progress in audio fidelity has been rapid, from the simple error beep of the earliest personal computers to the 16-bit, CD-quality stereo sound input and output of today's multimedia machines. The next stage of digital audio evolution has already begun with advanced music synthesis, multi-stream processing and realistic three-dimensional sound reproduction. ESS Technology, Inc. (ESS) is playing a major role in this transition by providing a range of tightly integrated, high-performance audio solutions. With its base of audio technology and market knowledge, ESS continues to add to the richness and intensity that sound adds to the multimedia experience.

History of Ess Technology, Inc.

ESS Technology, Inc. manufactures highly integrated mixed signal semiconductor multimedia solutions, including software, for the personal computer and consumer electronics markets worldwide. The company is a world leader in single-chip audio solutions technology for sale to multimedia desktop and notebook computer manufacturers, a major supplier of digital video chips, and an emerging supplier of high-speed communications chipsets. The company was incorporated in California in 1984. President, CEO and Chairman Fred S. L. Chan was hired in November 1985 and elected a director in January 1986. Chan was founder and former president and CEO of AC Design Inc., a VLSI chip design center providing CAD, engineering, and design services, and cofounder, president, and CEO of CADCAM Technology Inc., a company in the business of CAE systems development.

Headquartered in Fremont, California, the company lists among its principal competitors C-Cube, Cirrus Logic, Creative Technology, Hyundai, LSI Logic, Lucent, Oak Technology, OPTi, Rockwell, SGS Thompson, Texas Instruments, Winbond, and Yamaha. Major customers have included PC manufacturers such as AST, AT&T, Acer, BTC, Compaq, Dell, Digital Equipment Corporation, Eastbase, ECS, FIC, Fujitsu, Gateway 2000, GVC, Hewlett-Packard, Hitachi, IBM, ICL, Inventec, JK Micro, Labway, Matsushita, Mitac, NEC, Quanta, Samsung, Seiko-Epson, Sony, Texas Instruments, Toshiba, Trigem, Universe Electron Corporation, Western Publishing, and Xirlink.

Leading the Way in PC Audio Technology, the 1990s

In 1992, the company realized net revenues of $23.7 million and net income of $4.8 million. October of that year saw Fred Chan appointed chairman of the board. The following year, the company posted sales and net income of $15.2 million and $283,000, respectively. In 1994 the company bounced back from its low revenue and income figures and became known as a pioneer in the industry of audio for personal computers when it introduced the first single-chip audio device under its product line AudioDrive, integrating all the elements for sound on the PC and eliminating the need for separate and expensive devices, such as add-in sound cards, for each function.

Since that time, the company has continued to lead the way in PC audio technology, enhancing sound quality and introducing superior low-power sound chips for notebook PCs. The company additionally developed its own approach to FM synthesis that improves the sound of game music, added three-dimensional audio spatialization to enrich the sound field, and has developed an array of software--from device drivers to applications--that enable its OEM (original equipment manufacturer) customers to offer rich sound functionality in their products.

In March 1995, the company was served with a patent infringement claim by Yamaha Corporation, in which the latter claimed the company's ESFM products infringed upon patents held by Yamaha. The U.S. District Court in Los Angeles denied the request for a preliminary injunction, which Yamaha promptly appealed. The decision was upheld in the U.S. Court of Appeals for the Federal Circuit in March of the following year. By May, the two companies had settled all legal proceedings with each other. The company completed its initial public offering in October 1995 with over eight million shares sold for approximately $61.8 million.

With some of the company's competitors owning their own semiconductor manufacturing facilities, and with most of the company's semiconductor products being assembled by third-party vendors, including Amkor ANAM in Korea, ASAT in Hong Kong, Astra Microtronics in Indonesia, and Advanced Semiconductor Engineering and OSE in Taiwan, the company needed to do something to be able to more efficiently compete and keep its market share. Therefore, in November 1995, the company entered into agreements with two wafer foundries. In the first, with Taiwan Semiconductor Manufacturing Company Ltd., the company secured access to additional manufacturing capacity and certain proprietary technology. The second, with United Microelectronics Corporation, represented a joint venture in which the company would increase manufacturing capacity and engage in research and development. The company made similar agreements with Sharp Corporation in Japan and IC Works in California in 1996. The company purchased 16 acres of land in Fremont, California, upon which to build its new corporate facilities and ended the year with revenue reported at $105.7 million, a 216 percent jump over 1994 revenues, and net income of $29.9 million.

ESS began 1996 as a leader in providing audio solutions to the PC marketplace, with 35 percent of the market share. Able to manufacture a single-chip product that integrated all essential audio functions to enable PC manufacturers to deliver high-end sound capabilities, the company continued to show another year of dramatic growth. ESS also expanded into the digital video and fax/data modem marketplaces.

Successful Entry into the Video Market, 1996

The company made its entrance into the video market when, in January, it acquired VideoCore Technology Inc., a company that had been conducting research and development in integrated circuits which incorporate advanced digital video compression, for $5.7 million in cash and 525,000 shares of stock. After completing development of its first video product, the company introduced a new product line, called VideoDrive. The company's VideoDrive product family was built around a proprietary core engine, the programmable multimedia processor, which consisted of a digital signal processing architecture integrated with a RISC processor which offered the high performance needed to decompress and display video images. Because it was highly programmable, features, enhancements, and customized functionality through software could be easily added without redesigning the chip itself, significantly shortening time-to-market and reducing the overall system costs.

The first product in that line was a single-chip MPEG-1 video/audio system decoder that provided full-screen, full-motion video and selectable CD-quality audio for a variety of digital video playback applications such as karaoke players, VCD players, PC MPEG playback cards, and CD-XA video playback systems. An MPEG-2 fully-programmable video single-chip processor that incorporated the additional features needed for consumer electronics applications such as set-top boxes, multimedia PCs, and home entertainment units was announced as well. Shipments of these programmable chips began in the second quarter of the year to video CD player manufacturers worldwide, many in Asia, and, by year end, over 800,000 units had been shipped and the company had captured approximately 30 percent of the world market share.

The digital video marketplace was expanding rapidly. Driven by the continuing popularity of karaoke for home entertainment, especially in China; an increasing number of available movie titles for video CD players; and added system features and functions and lower video CD system costs, the acquisition of VideoCore and the subsequent development of VideoDrive enhanced the company's potential to acquire a large share of the marketplace.

Data and fax modem technology had revolutionized the speed and availability of information access. Use of the Internet and the World Wide Web alone had expanded beyond the academic and scientific communities to include most businesses and an increasing number of households. The modem itself was redefined to include not only high-speed data and fax communications capabilities, but also voice and audio features. Innovative applications, such as telephone answering machine and speakerphone functionality, continued to emerge. The company recognized the opportunity and the need for advanced communications products as a link for its multimedia solutions.

Expansion into Communications

Therefore, two months after the acquisition of VideoCore, the company expanded into the communications market with the acquisition of OSEE Corporation, an algorithm technology developer, for 217,000 shares of stock and $3.6 million in cash. Following the acquisition, the company combined OSEE's highly efficient and sophisticated modem algorithm technology with the company's existing audio technology, and introduced an integrated V.34bis fax/modem design, with significant advantages and support of speaker phone and Digital Simultaneous Voice and Data features. It was the company's first modem digital signal processor, which began production in early 1997 under the product line name of TeleDrive, and received favorable comments from Henderson Laboratories, an independent testing laboratory for modem products, being ranked "in the top 10 percent of modems" tested by that company and "easily #1 in the modems of its type."

New products released in 1996 included the ES1869 AudioDrive product, a high-integration, single-chip audio solution with high-fidelity performance and 3D audio effects; an audio accelerator; and an AC'97-compatible codec solution, offering high-throughput streams processing and high-fidelity performance. On the video front, the company released an advanced single-chip MPEG-2 A/V and Transport decoder for set-top box and Digital Versatile Disk (DVD) applications. The company also developed a line of fax/modem solutions that helped link the individual PC to the outside world.

By the end of 1996, the company had shipped over 90 million sound chips to consumer and personal computer OEMs around the world and its single-chip PC audio business had grown over 100 percent per year since 1994. The company's new 93,000-square-foot corporate headquarters building in Fremont was completed; sales and technical support centers were added in Beijing, Tokyo, and Seoul; the company's new design center was opened in Austin, Texas; and plans for additional facilities were announced. The number of employees grew from 158 to 253 and revenues hit $226.5 million at the end of the year, a 114 percent increase over the 1995 numbers, with a net income of $21.6 million.

1997 and Beyond

In April 1997, the company's board of directors authorized the repurchase of up to two million shares of the company's stock and two additional buildings were constructed at the Fremont site to house additional engineering capacity. June saw the company acquire Platform Technologies Inc., a developer of multimedia subsystems in a $32.7 million stock swap. In July, the company received Dolby Digital (AC-3)/MPEG certification from Dolby Laboratories for its ES3308 dual-engine Programmable Multimedia Processor, a digital audio/video decoder, which would allow DVD players equipped with that chip to faithfully reproduce film soundtracks. August brought the company into a joint venture with InnovaCom Inc., a leading developer of MPEG-2 solutions for broadcast-quality video compression, located in Santa Clara, California, to develop MPEG-2 encoding and decoding solutions for DVD authoring systems and Digital Video Broadcast Set Top Boxes. In October, the company announced the industry's first video CD chip that enhanced video CD systems to include Graphical User Interface (GUI) and Internet hyperlink features.

Products under development near the end of 1997 included new audio accelerator chips optimized for a new class of high-performance, Windows-based multimedia applications, including advanced digital audio processing to enhance the sensation of fully-positional, three-dimensional sound.

As the Internet and the World Wide Web continued to generate tremendous demand for faster, more cost-effective modem technologies and the ever-increasing demand in digital video compression technology, the company's flexible programmable architecture and proven success in the video CD player market positioned it to be a continuing leader in the marketplace.