Exhibit 99.2
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
On June 9, 2003 ESS Technology, Inc., a California corporation ("ESS"), acquired
Pictos Technologies, Inc., a Delaware corporation ("Pictos"), for $27 million in
cash pursuant to the Agreement and Plan of Merger dated June 9, 2003 (the
"Merger Agreement"), by and among ESS, Pictos, and Pictos Acquisition
Corporation, a Delaware corporation and wholly owned subsidiary of ESS ("Merger
Sub"). ESS consummated the merger of Merger Sub with and into Pictos (the
"Merger"). As a result of the Merger, Pictos became a direct, wholly-owned
subsidiary of ESS. The following unaudited pro forma condensed combined
financial statements are presented to illustrate the effects of the Merger on
the historical operating results of ESS and Pictos using the purchase method of
accounting in accordance with generally accepted accounting principles in the
United States of America. The unaudited pro forma condensed combined financial
statements are based upon the historical financial statements of the respective
companies. The unaudited pro forma condensed combined balance sheet as of June
30, 2003, illustrating the effects of the Merger as of the most recent interim
date, is included in the Company's Quarterly Report on Form 10-Q for the three
and six months ended June 30, 2003 filed with the Securities and Exchange
Commission on August 14, 2003 and therefore omitted from this Current Report on
Form 8-K/A.
The unaudited pro forma condensed combined statements of operations for the year
ended December 31, 2002 assumes the Merger took place as of January 1, 2002 and
combines ESS' consolidated statement of operations for the year ended December
31, 2002 and Pictos' consolidated statement of operations for the year ended
December 27, 2002.
The unaudited pro forma condensed combined statement of operations for the three
months ended March 31, 2003 assumes the Merger took place as of January 1, 2002
and combines ESS' unaudited condensed consolidated statement of operations for
the three months ended March 31, 2003 and Pictos' unaudited condensed
consolidated statement of operations for the three months ended March 28, 2003.
The unaudited pro forma statements include adjustments to reflect the purchase
price consideration (which included cash of $27.0 million and $417,000 of
transaction costs directly associated with the Merger) and the acquired assets
and liabilities of Pictos. The allocation of the Merger Consideration is based
on an appraisal of the fair value of Pictos' tangible assets acquired,
liabilities assumed, identifiable intangible assets and goodwill at the time of
the consummation of the Merger.
The pro forma statements are provided for illustrative purposes only and do not
purport to represent what the actual consolidated results of operations or the
consolidated financial position of ESS would have been had the Merger occurred
on the dates assumed, nor are they necessarily indicative of future consolidated
results of operations.
These unaudited pro forma condensed combined financial statements should be read
in conjunction with the historical consolidated financial statements and related
notes thereto of ESS included in its Quarterly and Annual Reports on Forms 10-Q
and 10-K and the historical consolidated financial statements and related notes
thereto of Pictos included in this Current Report on Form 8-K/A.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Year Ended December 31, 2002
Historical Pro Forma
ESS Pictos Adjustments Combined
----------- ----------- ---------- ----------
Statement of Operations Data:
Net revenues $ 273,442 $ 4,021 $ 277,463
Cost of revenues 176,454 3,963 1,200 (1) 181,617
----------- ---------- --------- ---------
Gross profit 96,988 58 (1,200) 95,846
Operating expenses:
Research and development 26,964 6,833 33,797
Selling, general and administrative 34,170 8,425 1,820 (1) 44,415
Amortization of other intangible assets 817 (817) (2)
In-process research and development 2,900 (2,900) (3)
Loss on disposal of fixed assets 107 107
----------- ---------- --------- ---------
Total operating expenses 61,134 19,082 (1,897) 78,319
Operating income (loss) 35,854 (19,024) 697 17,527
Nonoperating income, net 2,407 1,516 3,923
---------- ---------- --------- ---------
Income (loss) before income taxes 38,261 (17,508) 697 21,450
Provision for (benefit from) income taxes 984 -- (1,238) (4) (254)
---------- ---------- --------- ---------
Net income (loss) $ 37,277 $ (17,508) $ 1,935 $ 21,704
========== ========== ========= =========
Net income (loss) per share - basic $ 0.85 $ 0.49
========== =========
Net income (loss) per share - diluted $ 0.80 $ 0.46
========== =========
Shares - basic 44,044 44,044
========== =========
Shares - diluted 46,731 46,731
========== =========
See accompanying notes to unaudited pro forma condensed combined financial
information.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Three Months Ended March 31, 2003
Historical Pro Forma
ESS Pictos Adjustments Combined
-------- -------- -------- --------
Statement of Operations Data:
Net revenues $ 33,151 $ 1,268 $ 34,419
Cost of revenues 23,376 1,156 300 (1) 24,832
-------- -------- -------- --------
Gross profit 9,775 112 (300) 9,587
Operating expenses:
Research and development 6,256 2,968 9,224
Selling, general and administrative 6,674 2,060 368 (1) 9,102
Amortization of other intangible assets 408 (408)(2) --
-------- -------- -------- --------
Total operating expenses 12,930 5,436 (40) 18,326
Operating income (loss) (3,155) (5,324) (260) (8,739)
Nonoperating income, net 944 105 1,049
-------- -------- -------- --------
Income (loss) before income taxes (2,211) (5,219) (260) (7,690)
Benefit from income taxes (98) -- (294)(4) (372)
-------- -------- -------- --------
Net income (loss) $ (2,113) $ (5,219) $ 14 $ (7,318)
======== ======== ======== ========
Net income (loss) per share - basic $ (0.05) $ (0.18)
======== ========
Net income (loss) per share - diluted $ (0.05) $ (0.18)
======== ========
Shares - basic 41,662 41,662
======== ========
Shares - diluted 41,662 41,662
======== ========
See accompanying notes to unaudited pro forma condensed combined financial
information.
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
1. BASIS OF PRO FORMA PRESENTATION
On June 9, 2003, ESS acquired 100% of the outstanding shares of Pictos
Technologies, Inc., a Delaware corporation ("Pictos") for $27.0 million in cash.
Pictos, a privately held company based in Newport Beach, CA, designs,
manufactures and markets digital imaging semiconductor products. The acquisition
expands ESS' product lines in the digital imaging consumer electronics market
with advanced CMOS sensor and image processor solutions for digital still
cameras and cellular camera phones. The acquisition was accounted for as a
purchase combination under SFAS No. 141, "Business combination,". Accordingly,
the estimated fair value of assets acquired and liabilities assumed were
included in ESS' condensed consolidated balance sheet as of June 9, 2003, the
effective date of the purchase. The results of operations are included in ESS'
condensed consolidated results of operations as of and since the effective date
of the purchase. There were no significant differences between the accounting
policies of ESS and Pictos.
ESS allocated the purchase price of $27.0 million and $417,000 of legal
and other professional expenses directly associated with the acquisition as
follows based on the fair values of the assets acquired and liabilities assumed.
The fair value of identifiable intangible assets, goodwill and in-process
research and development are based on an appraisal. The fair value of $1.4
million allocated to in-process research and development was expensed
immediately during the three months ended June 30, 2003. Identifiable intangible
assets of $7.9 million will be amortized over their respective estimated useful
lives.
The purchase price and related expenses of $27.4 million were preliminarily
allocated as follows:
PURCHASE PRICE ALLOCATION AMOUNTS
- ------------------------- -------
(IN THOUSANDS)
Tangible assets $ 8,160
Identifiable intangible assets 7,850
Goodwill 18,144
--------
Total assets acquired 34,154
Liabilities assumed (4,938)
Deferred tax liabilities (3,219)
--------
Net assets acquired 25,997
In process research and development 1,420
--------
Total consideration $ 27,417
========
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
(CONTINUED)
The following table lists the components of $7.9 million identifiable intangible
assets and their respective useful lives.
IDENTIFIABLE INTANGIBLE ASSETS ESTIMATED FAIR VALUE ESTIMATED LIFE
(IN THOUSANDS) (IN YEARS)
Existing technology $3,600 3
Patents and core technology 1,800 3
Customer relationships 1,080 3
Distributor relationships 90 2
Foundry agreement 930 2
Order backlog 350 0.5
------
Total identifiable intangible assets $7,850
======
The following table summarizes the annual amortization expenses for identifiable
intangible assets through 2006.
AMORTIZATION EXPENSES FOR AMOUNTS
- ------------------------- -------
YEAR ENDING DECEMBER 31, (IN THOUSANDS)
2003 $1,841
2004 2,670
2005 2,385
2006 954
- ------ ------
Total $7,850
======
In accordance with Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets," goodwill will not be amortized and will
be tested for impairment at least annually. The preliminary purchase price
allocation for Pictos is subject to revision as more detailed analysis is
completed and additional information on the fair values of Pictos' assets and
liabilities become available. Any change in the fair value of the net assets of
Pictos will change the amount of the purchase price allocable to goodwill. Final
purchase accounting adjustments may therefore differ materially from the pro
forma adjustments presented here.
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
(CONTINUED)
2. PRO FORMA ADJUSTMENTS
Certain reclassifications have been made to conform Pictos' historical amounts
to ESS' financial statement presentation.
The accompanying unaudited pro forma combined condensed statements of operations
have been prepared as if the merger was completed as of January 1, 2002 and
reflect the following pro forma adjustments:
(1) To amortize intangible assets resulting from the Merger;
(2) To eliminate amortization expense of Pictos' intangible assets resulting
from Pictos' previous acquisition occurred during the year ended December 27,
2002;
(3) To reflect elimination of the in-process research and development charge
related to Pictos' previous acquisition occurred during the year ended December
27, 2002; and
(4) To adjust the provision for taxes to reflect the impact of the pro forma
adjustments.
The one-time charge to expense for the fair value of the in-process research and
development acquired in the Merger has been excluded from the unaudited pro
forma condensed combined statement of operations due to its non-recurring
nature.