SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Fiscal Year ended September 29, 1996
Commission File Number 2-23128
QUALITY SEMICONDUCTOR, INC.
(Exact name of registrant as specified in its charter)
California 77-0199189
(State of incorporation) (I.R.S. Employer
Identification Number)
851 Martin Avenue
Santa Clara, CA 95050
(Address of principal executive offices)
Registrant's telephone number, including area code: (408) 450-8000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of Class Name of Exchange
- ----------------------------- -----------------------------
Common Stock, $.001 par value NASDAQ/National Market System
Indicate by check mark 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 ___
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statement incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
The aggregate market value of the voting stock held by non-affiliates of the
registrant (based on the closing price as reported on the NASDAQ/NMS for
November 21, 1996 was $33,695,021. Shares of Common Stock held by each executive
officer and director and by each person who owns 5% or more of the outstanding
Common Stock have been excluded in that such persons may be deemed to be
affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes. The number of outstanding shares of
the registrant's Common Stock as of November 21, 1996 was 5,536,207.
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PART I
Item 1. Business
Quality Semiconductor, Inc. ("QSI" or the "Company") designs, develops and
markets high-performance logic as well as logic-intensive specialty memory
products and advanced networking semiconductor products. The Company targets
systems manufactures principally in the networking, personal computer and
workstation, and telecommunications markets. QSI's logic products include the
3.3-volt and 5-volt QSFCT family and 3.3-volt LCX family, high-speed, low-noise
interface logic devices that interconnect various elements in a
microprocessor-based system, and the QuickSwitch family of high-speed, low
resistance bus switches, which can be used for many applications, such as
facilitating the use of mixed voltages in a microprocessor-based system. QSI's
specialty memory products include a family of dual port RAMs, and some of the
fastest FIFO (First-In, First-Out) devices currently available. QSI networking
products include an ATM multiplexer/demultiplex and 10/100 Base TX Fast Ethernet
transceivers for symbol and MII interface.
Industry Background
Higher System Performance Requirements
The worldwide demand for processing and transmitting information is
growing rapidly. This has created major challenges and opportunities for
manufacturers of electronic systems that must continue to increase system
performance to meet these demands. Historically, the markets for
high-performance electronic systems were limited to advanced, small volume
applications. However, recent trends in the networking, personal computer and
workstation, telecommunication, and portable systems markets have dramatically
increased the demand for high-performance systems.
Networking
The proliferation of LANs (Local Area Networks) and WANs (Wide Area
Networks) is increasing the demand for high-performance networking and
internetworking products. In order to enhance the performance of networks,
network managers are demanding higher performance networking products, which in
turn increase the demand for higher performance logic and memory components.
Personal Computer and Workstation
Demand for higher performance computers and workstations is increasing
as graphical user interfaces are more universally adopted, desktop data
processing requirements are growing and new performance-intensive applications,
such as multimedia and image processing, are consuming more microprocessor and
video bandwidth. To meet this need, personal computer and workstation
manufactures are demanding increasingly higher performance controllers,
subsystems and peripheral devices that operate in tandem with these systems.
Telecommunications
Telecommunications companies are increasingly installing advanced fiber
optic networks capable of transmitting hundreds of times more voice and data
information, at much higher transmission speeds, than was possible just a few
years ago. The demand for higher performance systems is expected to continue to
grow as the industry moves towards mixing text, voice, image, video and other
data types. In order for these companies to transmit and switch data at such
high speeds, telecommunications equipment
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manufactures are demanding higher performance logic and memory devices for their
increasingly advanced systems products.
Portable Systems
The emerging demand for portability in computing and communication has
created a market for lightweight, battery-operated portable computers and
personal communication systems. Certain of these communications-intensive
products are becoming widely available due to recent developments in wireless
communications and the availability of low power dissipation, high performance
microprocessors. These products also require logic and memory circuits
characterized by low power dissipation to conserve battery life and reduce
weight, small packaging to reduce the size of the portable system, and high
performance to support applications similar to those implemented in desktop
systems.
Demand for Higher Performance Integrated Circuits
The increasing demand for higher performance microprocessor-based systems
in applications such as networking, personal computers, workstations,
telecommunications and mobile computing has created a need for higher
performance system components. During the last ten years, system speeds have
increased from less than 10 MHz (megahertz) to more than 150 MHz and bus widths
(the number of signals handled in parallel between system components) have
expanded from 8 bits to 64 bits or more. In order to realize the benefits of
faster microprocessors and avoid bottlenecks elsewhere in the system, system
designers are demanding higher performance interface logic and memory integrated
circuits.
The QSI Solution
QSI develops and markets semiconductor products for the growing
high-performance logic, memory, and networking markets by exploiting its design
expertise and packaging innovations. QSI also works with its customers to
anticipate and solve speed, functionality and size problems encountered as
systems designers continuously strive to enhance the performance of their system
products.
Networking Products
QSI offers two advanced CMOS Fast Ethernet devices that offer design
engineers enhancements which can become a seamless additions to their printed
circuit board-design, thereby reducing the number and type of external
components as well as the overall board space required to implement the enhanced
design.
High Performance Interface Logic Devices
The Company believes that its high performance interface logic family,
consisting of the QSFCT, LCX, QuickSwitch and clock management product lines,
are positioned to meet the needs of designers of high-performance systems. The
Company's 3.3-volt and 5-volt QSFCT product line offers not only high speed and
low power dissipation, but also offers reduced noise generation through improved
design, integration of resistors into the logic device and reduced-size
packaging. The new LCX family is designed for operation with 3.3 volt power
supplies and has the ability to interface with both 3.3 and 5 volt components,
allowing system designers the maximum flexibility on a "mixed voltage" circuit
board. QSI's QuickSwitch family of high-speed, low resistance switches can be
used to isolate and couple sections of systems logic without introducing
performance penalties. QSI has introduced two new devices using proprietary
QuickScanTM technology, to provide JTAG access to a data bus while being
virtually transparent to the system during normal, non JTAG, operation. QSI's
clock management products enable system designers to achieve low-skew clock
signal distribution, which can eliminate the need for higher-cost, high-speed
logic devices. These QSFCT, QuickSwitch, QuickScanTM
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and clock management products also feature several innovative semiconductor
packaging improvements such as the new follow-through MillipaQTM package for
32-bit logic functions.
High Performance Specialty Memory Devices
QSI believes that it offers some of the industry's fastest FIFO and other
specialized memory devices in the high-performance segment of the specialty
memory market. These high performance specialty memory devices offer speeds
comparable to that achieved by more complex BiCMOS processes, but at finer
geometries thus requiring less power reducing temperature sensitivity and
improving radiation-immunity characteristics.
QSI Strategy
The Company's objective is to be a leading provider of high-performance
logic and logic-intensive specialty memory devices to the growing networking,
personal computer and workstation, telecommunications and portable systems
markets. The Company seeks to position itself in these markets through broad
product offerings, customer interaction in the development of new products and
strategic relationships with its fabrication suppliers. The Company's strategy
includes the following key elements:
Target Key Systems Manufacturers in High-Growth Markets
The Company focuses its product development and marketing efforts to
increase sales of high performance logic and logic-intensive specialty memory
products to systems manufactures in the growing networking, personal computer
and workstation, telecommunications and portable systems markets. The Company
seeks to target new and existing system manufacturer in these fields that are
the system performance or volume sales leaders in their respective markets. The
Company believes that the high performance logic and memory components adopted
by these leading system manufacturerr are likely to be adopted by other system
manufacturers, which may create opportunities for higher volume sales of the
Company's products.
Develop New Products based Upon Customer Input
QSI seeks to expand its interface logic, ultra-fast specialty memory
product, and networking families by continuing to work closely with its
customers to anticipate and develop high performance solutions to improve system
performance. Through these relationships with systems manufacturers, the Company
has developed QSFCT logic circuits with reduced noise level, switch time and
propagation delay; the QuickSwitch family of high-speed bus connection logic
devices that offer higher performance than traditional TTL buffers; and
packaging innovations offering significant design advantages through board space
savings and resulting in cost-reductions. The Company also intends to work
closely with system manufacturers to develop integrated logic and memory
products. The newly introduced Fast Ethernet products represent a close
relationship with our customers, and an understanding of their system
requirements.
Achieve Design Wins in New Product Areas
The Company intends to offer new products with applications beyond those of
the Company's current QSFCT, specialty memory, and networking product families.
The Company has recently developed and is shipping high-performance products for
applications in system clock management, including low-skew fanout buffers and
phase lock loop devices. QSI also intends to continue expansion of the
QuickSwitch product family, particularly for specialized networking and
telecommunications systems
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applications, and to add new QuickSwitch products such as QuickScanTM with
specialized functions that facilitate the testing of certain elements within
systems.
Broaden Wafer Fabrication Capabilities
The Company has completed the purchase of a complete wafer fabrication
facility in Sydney, Australia. With this acquisition, QSI now has its own
dedicated wafer design, engineering, and fabrication capability. The Company
also intends to utilize its current wafer foundry partners; Seiko, Ricoh, and
Taiwan Semiconductor Manufacturing Corporation ("TSMC"). All of these facilities
have been qualified and are currently producing a variety of standard logic,
memory and networking products.
Expand International Sales
The Company believes there are significant opportunities for increased
international sales of its products, particularly in European and Asian markets.
The Company intends to invest additional resources, including the addition of
new foreign sales offices and personnel, in order to increase its worldwide
customer base and international product revenues.
Products
The Company offers a wide range of high performance logic, logic
intensive specialty memory, and networking products for systems manufacturers in
a variety of markets, including the networking, personal computer and
workstation, peripherals, I/O subsystems, telecommunications and portable
systems industries.
High Performance Networking Products
The Company introduced three new networking products during the year. The
QS6810 ATM 4:1 Multiplexer/Demultiplexer will serve the ATM Switch and
Transmission Market. The QS6611 10/100 TX/Fast Ethernet Symbol Transceiver and
the QS6612 10/100 Base TX Ethernet MII Transceivers are the first members of a
family of networking products to serve the LAN and WAN markets. The Company's
product development in the networking market is directed to multimedia
applications and interoperability.
High Performance Logic Products
The Company offers more than 100 interface logic products, which
support bus interfaces, memory interfaces and other logic support applications
where high speed is critical. QSI's family of logic products is available in a
variety of small packages, enabling efficient use of board area. Many of these
products are designed for fast growing applications, such as mobile computing
and communications, in which small size and low power consumption may be as
important as high speed.
QSFCT Interface Logic Devices
FCT logic devices address the high-performance segment of the interface
logic market. Demand for these products comes primarily from bus interface
applications where low propagation delays, low power consumption and
space-efficient packaging are principal concerns. QSI's QSOP and QVSOP packaging
technology can reduce required board space by up to 75% as compared to SOIC
(Small Outline Integrated Circuit) packaging. QSI believes that its 2000 Series
logic was the first FCT logic family to include on-chip series termination
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resistors that further reduce ground bounce. The Company has continued to
address common system design problems with value-added new product solutions,
including double-width logic, which satisfies the need for logic applications of
more than 8-bits, and 3.3 volt logic, which addresses the need for lower power,
lower noise components.
QuickSwitch Devices
The Company's innovative QuickSwitch family of products consists of
high-speed switches for direct bus connection with virtually no delay (250
picoseconds, or 0.25 nanosecond), no added ground bounce, no added power
dissipation, and requiring no directional control. QuickSwitch devices provide
higher performance alternatives to FCT and other families of interface logic
where high current drive capability is not required, and can replace traditional
TTL buffers and transceivers (components that can both transmit and receive
signals) to reduce overall propagation delay, noise, control complexity and
power consumption. The Company has experienced growth in sales of the
QuickSwitch product family in the data communication, telecommunication,
workstation and peripheral interface markets because of the products' signal
switching and routing capabilities. QSI's current QuickSwitch offering includes
28 different products designed for applications such as digital and analog
switching, 5.0-to-3.3-volt conversion, signal swapping, multiplexing, and
pin-for-pin replacement of standard logic components. The Company is developing
new products in the QuickSwitch family by incorporating features of the
QuickSwitch design into higher integration products, such as a series of
crossbar switches and QuickScan devices for boundary scan test applications.
Clock Management Devices
As clock speeds of microprocessors increase, previously acceptable
levels of clock signal skew (timing variance of clock signals within a system)
can cause fatal timing errors. QSI's product solutions for clock signal
distribution are intended to enable system designers to achieve low-skew clock
signal distribution, which can eliminate the need for higher-cost high-speed
logic devices. The clock buffer family of products allows single or multiple
clock inputs to be distributed across up to 22 output pins with guaranteed low
skew. The Company's PLL (Phase-Locked-Loop) clock driver was designed to
duplicate an input clock while also providing various output options.
High Performance Specialty Memory Products
The Company's specialty memory products include FIFO, Dual-Port RAM and
Shared-Port RAM products for networking, peripheral interface and
telecommunications products including hubs, bridges, routers, and other
performance-driven applications. The market for specialty memory has been
historically driven by telecommunications and DSP (Digital Signal Processing)
applications that typically require large amounts of high performance digital
data buffering.
FIFO Memory Products
FIFO products are used as rate buffers to transfer large amounts of data at
high speeds between separate devices or pieces of equipment operating at
different speeds within a system. QSI offers asynchronous FIFO memory products,
featuring depths of up to 4kb and access times of below 10ns, with fast flags.
QSI's FIFO products use only two master read and write counters as compared to
six internal counters in typical FIFO products, thereby decreasing ground bounce
and the potential for flag and data corruption. Unlike most other currently
available FIFO products, which use only six-transistor memory cells with
polysilicon load resistors, QSI's FIFO products use eight CMOS transistor memory
cells to provide greater speed, soft-error resistance, and process and
temperature stability. QSI's FIFO products. The Company is developing a 36-bit
family of FIFO products intended to satisfy the increasing demand for 36-bit and
wider memory buffers in high bandwidth digital systems.
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also have noise filter circuitry to reduce data errors caused by noise on the
clock and enable inputs. The Company's FIFO products currently are used
primarily in networking products.
Dual-Port RAM Products
Dual-Port RAM products are used in multi-processor systems, where there
is a need for interprocessor communication. QSI is developing a family of
Dual-Port RAM devices with densities up to 256K bits. These devices have built
in facilities to allow full arbitration between ports, via the fast busy flags
and semaphore cells. QSI Dual-Port RAM products are built using eight transistor
cell memory technology which provides greater stability than prevailing six
transistor cell architecture, soft error resistance, and reduced process and
temperature sensitivity.
Shared-Port RAM Product
Shared-Port RAM products are used for interprocessor communication at
high speed (3.66G bits/second) and are suited to networking and multimedia
applications. Using the Company's proprietary memory compiling and logic routing
design tools, QSI has integrated 288k of memory and 20k gates of logic into this
single-chip solution. By using a more cost effective shared SRAM memory core,
the proprietary Shared-Port RAM provides higher performance and a greater
density than traditional Dual-Port RAM architectures.
Packaging
The increasing complexity and portability of electronics systems has
resulted in an increasing demand for smaller sized packaged semiconductor
components. To address this demand QSI has innovated and implemented several
semiconductor packaging improvements.
In 1990, QSI introduced the surface mount QSOP (Quarter Size Outline
Package), which has been adopted as an industry standard by JEDEC (Joint
Electronic Device Engineering Council), and is used by some of the Company's
competitors. QSI's QSFCT logic, QuickSwitch and clock management products are
offered in the QSOP package. The QSOP package reduces the board area occupied by
the packaged component by approximately 75% over the standard SOIC package by
halving the width, length and the lead pitch (the distance between the exterior
pins) of the package.
QSI also has introduced its QVSOP package, which uses the same plastic
body as the QSOP but adds more pins, and thus additional functionality. QVSOP
package yields 16 to 20-bit "double-width" products that are increasingly
demanded for high performance systems applications. QSI also offers the HQSOP
package, a hermetic SOP, intended for military, aerospace and other high
reliability applications. The Company was also the first to offer logic products
in the industry standard ZIP (Zig-zag In Line Package), thereby providing small,
high-performance logic-devices to system manufacturers having only through-hole
assembly capabilities.
QSI's latest 32-bit flowthrough package, the MillipaQTM, provides
design engineers with the industries smallest and easiest to use high-density
package.
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Customers and Applications
QSI's customers are performance-oriented systems manufacturers in
industries such as networking, personal computers and workstations. QSI ships
products to more than 10 customers on an OEM (Original Equipment Manufacturer)
basis and to more than 1,400 customers through the Company's distributors.
A relatively small number of customers have accounted for a significant
portion of the Company's revenue in each of the past several fiscal years. In
fiscal 1995 and 1994, sales to the Company's top ten systems manufacturer
customers accounted for more than half of total product revenues. No systems
manufacturer customer accounted for sales in excess of 10% of the Company's
total product revenues in fiscal 1995; sales to Compaq Computer and Silicon
Graphics accounted for approximately 13% and 10%, respectively of the Company's
total product revenues in fiscal 1994; and no systems manufacturer customer
accounted for sales in excess of 10% of the Company's total product revenues in
fiscal 1993. There can be no assurance that QSI's current customers will
continue to place orders with the Company, that orders by existing customers
will continue at levels of previous periods, or that the Company will be able to
obtain orders from new customers. Loss of one or more of the Company's current
customers could materially and adversely affect the Company's business,
operating results and financial condition. In addition, the Company has
experienced and may continue to experience lower margins on sales to significant
customers as a result of volume pricing arrangements.
Backlog
As of September 30, 1996, the Company's backlog was approximately $13.0
million, as compared to approximately $12.1 million at September 30, 1995. The
Company's backlog includes OEM and distributor purchase orders accepted by the
Company for products scheduled for shipment within the following six months.
Orders constituting the Company's backlog are subject to delivery rescheduling,
price renegotiations and cancellation at the option of the buyer without
significant penalty. The Company's business, in line with that of much of the
semiconductor industry, is characterized by short lead-time orders and quick
delivery schedules. In addition, the Company's actual shipments depend upon the
manufacturing capacity and timely delivery of the Company's wafer fabrication
suppliers. Although useful for the purposes of short-term scheduling, backlog as
of any particular date may not be a reliable measure of sales for any future
period.
Sales and Distribution
The Company markets its products primarily to systems manufacturers in
North America through its distributors and independent manufacturers
representatives, and internationally through foreign distributors. The Company
has three principal North American distributors, Arrow, Nu-Horizons and Bell
Industries. Domestic distributors accounted for approximately 26% of the
Company's total product sales during fiscal 1996. Arrow Electronics accounted
for more than half of such sales in each period. The Company defers recognition
of revenue and related gross profit from sales of products to these distributors
until after the distributors have resold these products to their customers. In
addition, QSI's independent manufacturers' sales representatives in the United
States and Canada generally assist the Company in achieving design wins and
procuring purchase orders from systems manufacturers.
To assist the Company's distributor and independent sales
representative, the Company has as of September 30, 1996, nine sales
professionals located at the Company's sales offices in northern and southern
California, Georgia, Massachusetts and the United Kingdom. The Company also
employs six
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field application engineers who work directly with Company's customers to assist
them in designing systems incorporating the Company's products.
Sales outside of the United States accounted for approximately 43%, 29%
and 21% of net product sales for fiscal years ended September 30, 1996, 1995,
and 1994, respectively. The Company expects that export sales will continue to
represent a significant portion of its product sales. Export sales are subject
to certain risks, including currency controls and fluctuations, changes in local
economic conditions, import and export controls and changes in tax laws, tariffs
and freight rates.
The Company's manufacturers' representatives and distributors are not
subject to minimum purchase requirements and can discontinue marketing any of
the Company's products at any time. The Company's distributors typically offer
competing products. Although the Company believes that, to date it has provided
adequate allowances for exchanges and returns, there can be no assurance that
actual returns or exchanges will not exceed the Company's allowance,
particularly in connection with the introduction of new products or enhancements
or existing products. In addition there can be no assurance that future sales by
distributors or representatives will continue at present levels. The loss of one
or more manufacturers' representatives or distributors, or the decision by one
or more distributors to reduce the number of the Company's products offered by
such distributor or to carry the product lines of the Company's competitors,
could have a material adverse effect on the Company's operating results.
Competition
The company competes in different product areas, to varying degrees, on
the basis of technical innovation and performance of its products, including
their speed, density, power usage, reliability, and space-saving package
options, as well as on price, quality and product availability. The Company's
competitive strategy is to offer high-performance, small packaged products.
The semiconductor industry is intensely competitive and is characterized by
price erosion, declining gross margins, rapid technology changes, product
obsolescence and heightened international competition in many markets. The
Company's competitors include large semiconductor companies, such as Integrated
Device Technology, Inc., Texas Instruments Incorporated National Semiconductor
Corporation and Cypress Semiconductor Corporation, that have substantially
greater financial, technical, marketing, distribution and other resources,
broader product lines and longer standing relationships with customers than the
Company, as well as emerging companies attempting to sell products to
specialized markets such as those addressed by the Company. In the event of a
downturn in the market for interface logic or specialty memory components,
companies that have broader product lines and longer standing customer
relationships may be in a stronger competitive position that the Company.
Competitors with greater financial resources or broader product lines also may
have more resources than the Company to engage in sustained price reductions in
the Company's primary markets to gain market share.
The Company is continually in the process of designing new improved
products to maintain its competitive position. Because of continual improvements
in semiconductor design and processing technology, the Company believes that its
future success will depend on its ability to continue to improve its products
and processes and develop new technologies and products in order to remain
competitive. Many of the Company's competitors have had internal manufacturing
capacity for the fabrication and assembly of semiconductor products, which may
provide such companies with more reliable manufacturing capability, shorter
development and manufacturing cycles and time-to-market advantages. The Company
is only now developing this capacity since the acquisition of the wafer
fabrication facility in February 1996. Competitors having their own wafer
fabrication facilities, or access to suppliers having such facilities, with
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smaller geometries or superior process technologies at the same geometries could
manufacture and sell competitive, higher performance products at a lower price.
Introduction of products by competitors that are manufactured with improved
process technology could materially and adversely affect the Company's operating
results.
As is typical in the semiconductor industry, competitors of the Company
have developed and market products having similar or identical design and
functionality as the Company's products, and the Company expects that this will
continue in the future. For example, products that are pin-compatible with many
of the Company's QSFCT products are available from competitors. To the extent
the Company's products do not achieve performance, size or other advantages over
products offered by competitors, the Company will experience greater price
competition with respect to such products. The Company also faces competition
from the makers of microprocessors or other system devices, including ASICs,
that have been and may be developed for particular systems. These devices
increasingly include interface logic and specialty memory functions and as a
result may eliminate the need or sharply reduce the demand for the Company's
products in particular applications.
The Company believes that its ability to compete successfully depends
on a number of factors both within and outside of its control, including price,
product quality, performance, success in developing new products, adequate
fabrication capacity and sources of raw materials, efficiency of production,
timing of new product introductions by competitors, protection of Company
products by effective utilization of intellectual property laws, and general
market and economic conditions. There can be no assurance that the Company will
be able to compete successfully in the future.
Manufacturing
Wafer Fabrication
The Company's semiconductor products are primarily fabricated in Japan
by Seiko Instruments Inc. ("Seiko") and Ricoh Corporation ("Ricoh"), and the
remainder of the Company's products, including the Company's more advanced,
smaller geometry circuits, are fabricated by Yamaha Corporation ("Yamaha") and
Taiwan Semiconductor Manufacturing Company ("TSMC"). The Company's agreements
with Seiko contain capacity commitments to manufacture specified numbers of
wafers for the Company on a most-favored customer price basis. The Company
believes that this commitment, which continues through 1998, is adequate to meet
the Company's currently foreseeable manufacturing needs during such periods.
Currently, approximately 85% of the wafers for the Company's
semiconductor products, including substantially all of the Company's high volume
QSFCT products, are fabricated by Seiko and Ricoh. In connection with these
fabrication arrangements, the Company has granted Seiko and Yamaha perpetual,
non-exclusive licenses to use the Company's QCMOS process technology to
manufacture integrated circuits at their facilities in Japan, including for
their own use and, for the purpose of fabricating integrated circuits for third
parties, subject to certain competitive restrictions. In exchange for these
licenses, the Company received an aggregate of more than $13 million in
technology development and license fees, and the Company also has certain rights
to use process improvements that may be developed by Seiko. The Company also is
entitled to receive additional royalties upon the sale of products manufactured
by Seiko or Yamaha for third parties using the Company's process technology,
although no such products have been manufactured to date or currently are
proposed to be manufactured. The license agreements contain certain restrictions
an the right of Seiko and Yamaha to use the Company's process technology to
manufacture and sell certain products, including those within the fields of the
Company's primary logic and memory
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markets. Subject to certain royalty payment requirements, Seiko has a
non-exclusive license to use the Company's designs to manufacture certain
products for sale in Japan, although they have not done so to date. As part of
their relationship with the Company, in 1989 and 1991, Seiko purchased Preferred
Stock of the Company for a total investment of $1.1 million and in 1989, Yamaha
purchased Preferred Stock of the Company for a total investment of $625,000.
The Company's reliance on Seiko and Ricoh (which fabricate
approximately 85% of the of the Company's products, including substantially all
of the Company's high-volume QSFCT products) and TSMC (which currently
fabricates the Company's more advanced, smaller geometry circuits) to fabricate
its wafers involves significant risks, including reduced control over delivery
schedules, potential lack of adequate capacity, technical difficulties and
events limiting production, such as fires or other damage to production
facilities. The Company has from time to time experienced significant delays in
receiving fabricated wafers from its providers, and there can be no assurance
that the Company will not experience similar or more severe delays in the
future. Any inability or unwillingness of the Company's fabrication providers
generally, and Seiko in particular, to provide adequate quantities of finished
wafers to meet the Company's needs could delay shipments and have a material
adverse effect on the Company's operating results. The Company also depends upon
its fabrication suppliers to participate in process improvement efforts, such as
the transition to finer geometries, and any inability or unwillingness of such
suppliers to do so could adversely affect the Company's development and
introduction of new products. Competitors having their own wafer fabrication
facilities, or access to suppliers having such facilities, using superior
process technologies at the same geometries or manufacturing products at smaller
geometries, could manufacture and sell competitive, higher performance products
at a lower price. The introduction of such products by competitors could
materially and adversely affect the Company's operating results. The Company
acquired a wafer fabrication facility on February 16, 1996 which involves
significant risks inherent in any manufacturing endeavor, including production
yields, technical difficulties with process control, and events limiting
production, such as fires or other damage.
Although the Company has historically experienced good relationships with
Seiko and Yamaha, the Company has recently qualified a local manufacturer for
quick-turn fabrication of prototype products, and the Company has established a
second source for the production of standard products that are currently
manufactured primarily by Seiko. The Company also established a separate
supplier, as an alternative to Yamaha, for the fabrication of smaller geometry
circuits.
The manufacture of semiconductor products is highly complex and sensitive
to a wide variety of factors, including the level of contaminants in the
manufacturing environment, impurities in materials used and the performance of
personnel and equipment. While the Company believes that it will have an
adequate wafer supply to meet its needs, there can be no assurance that the
Company will receive sufficient quantities of wafers at favorable prices on a
timely basis, if at all. As is typical in the semiconductor industry, the
Company's wafer fabricators have from time to time experienced lower than
anticipated production yields. There can be no assurance that manufacturing
problems will not occur in the future. The loss of Seiko as a supplier, any
prolonged inability to obtain adequate yields or deliveries from such suppliers
or other subcontractors or manufacturer, or any other circumstance that would
require the Company to seek alternative sources of supply, could delay shipments
and have a material adverse effect on the Company's operating results.
Assembly
The Company performs circuit assembly through four overseas
subcontractors. In the assembly process, silicon wafers are cut into individual
die that are then assembled into packages in accordance with
<PAGE>
procedures developed by the Company. While the timeliness and quality of product
deliveries from the Company's subcontractors have been acceptable to date, there
can be no assurance that difficulties will not occur in the future. Any
significant disruption in adequate supplies from, or degradation in the quality
of components supplied by, these subcontractors, or any other circumstance that
would require the Company to qualify alternative sources of supply, could delay
shipment of products and have a material adverse effect on the Company's
operating results. Although the Company believes it has gained certain
competitive advantages through reduced-size packaging innovations, The Company
does not have exclusive rights to use such designs or related packaging methods
and many of the Company's packaging designs, such as the QSOP and QVSOP
packages, are currently available for products sold by the Company's
competitors. Also, there can be no assurance that the Company's assembly
subcontractors, who have gained significant expertise in the application of the
Company's packaging designs and methods, such as QSOP, QVSOP or HQSOP, will not
use such expertise in providing product assembly for the Company's competitors,
which could have an adverse effect on the Company's competitive position and its
results of operations.
Test
Following assembly, the packaged devices currently are tested and inspected
by the Company or its domestic test contractor or overseas assembly contractors
in accordance with the Company's quality assurance program before shipment to
customers. The Company recently increased its reliance on overseas testing
houses for product testing. While the timeliness and quality of product
deliveries from the Company's subcontractors have been acceptable to date, there
can be no assurance that assembly or testing difficulties will not occur in the
future. Any significant disruption in adequate supplies from these
subcontractors, or any other circumstance that would require the Company to
qualify alternative sources of supply, could delay shipment and result in the
loss of customers, limitations or reductions in the Company's revenues, and
other adverse effects on the Company's operating results. As a result of the
dependence of the Company on foreign subcontractors and test facilities, the
Company's business is subject to the risks generally associated with doing
business abroad, such as foreign governmental regulations, political unrest,
disruptions or delays and shipments and changes in economic conditions in
countries in which the Company's manufacturing and test assembly sources are
located.
Research and Development
The Company's research and development efforts are focused on the
design of new networking, interface logic and specialty memory devices,
improvements in the Company's process and design technologies, the development
of integrated logic and memory devices, improvement of existing device
performance, cost reductions in the manufacturing and assembly process and
improvements in device packaging. As of September 30, 1996, the Company had 57
employees involved in research and product development activities.
The Company's research, development and engineering expenses in the
fiscal years ended September 30, 1996, 1995 and 1994 were approximately $7.0
million, $6.3 million and $4.7 million, respectively. The Company expects that
it will continue to spend substantial funds on research and development.
Although the Company believes that in certain product lines it may be
desirable to apply its QCMOS process at smaller geometry's than it currently
uses and that it will be technologically possible to do so, there can be no
assurance that technological or other difficulties will not prevent or delay a
successful transition to smaller geometries. Also, given the Company's limited
financial and operational
<PAGE>
resources, The Company will depend substantially upon its fabrication suppliers
for research and development assistance in completing this transition. There can
be no assurance that any supplier will be willing or financially able to provide
such development assistance, or to make the significant financial commitments,
including investments in new fabrication facilities, that will be necessary to
implement production using QCMOS process at smaller geometries.
The Company's future success is highly dependent upon the timely completion
and introduction of new products at competitive price/performance levels. The
success of new products depends on a variety of factors, including product
selection, successful and timely completion of product development, the
Company's ability to secure sufficient wafer fabrication capacity, achievement
of acceptable wafer fabrication yields (the proportion of good die on a silicon
wafer) by the Company's recently acquired fabrication facility and independent
wafer suppliers, and the Company's ability to offer such new products at
competitive prices. There can be no assurance that the Company will be able to
successfully identify new product opportunities and develop and bring to market
such new products or that the Company will be able to respond effectively to new
technological changes or new product announcements by others. In addition, the
Company may experience delays, difficulty in procuring adequate fabrication
capacity for the development and manufacture of such new products or other
difficulties in achieving volume production of these new products. The failure
of the Company to complete and introduce new products in a timely manner and at
competitive price/performance levels would materially and adversely affect the
Company's operating results.
Licenses, Patents and Trademarks
The Company aggressively seeks the issuance of patents to protect
inventions and technology which are important to its business. The Company has
been awarded six United States patents in the area of circuit design and wafer
processing, with various expiration dates, none earlier than 2010. In addition,
the Company has four United States patent applications pending. The Company also
has six current foreign patent applications pending. The Company has four
registered U.S. trademarks. The Company has also routinely protected its
numerous original mask sets under the U.S. Semiconductor Chip Protection Act.
There can be no assurance that the Company's pending patent or trademark
applications will be allowed or that the issued or pending patents will not be
challenged or circumvented by competitors.
Notwithstanding the Company's pursuit of patent protection, the Company
believes that its future success will depend primarily upon the technical
expertise, creative skills and management abilities of its officers and key
employees rather than on a patent ownership. The Company also relies
substantially on trade secrets and propriety technology to protect its
technology and manufacturing know-how, and works actively to foster continuing
technological innovation to maintain and protect its competitive position. There
can be no assurance that the Company's competitors will not independently
develop or patent substantially equivalent or superior technologies. In
addition, in connection with its fabrication supply arrangements, the Company
has granted Seiko and Yamaha non-exclusive licenses to the Company's fabrication
process technology and certain of the Company's product designs, subject to
certain competitive restrictions and royalty requirements. There can be no
assurance that Seiko and Yamaha will not employ such technology to compete with
the Company.
The semiconductor industry is characterized by substantial litigation
regarding patent and other intellectual property rights. There can be no
assurance that third parties will not assert claims against the Company that
result in litigation. Any such litigation, whether or not determined in favor of
the Company, could result in significant expense and divert the Company's
attention from other matters. If any of the Company's products were found to
infringe any third party patent, and such patent were determined to be valid,
the third party would be entitled to injunctive relief, which would prevent the
Company from selling
<PAGE>
any such infringing products. In addition, depending on the number of infringing
products and the extent of sales of such products, the Company could suffer
significant monetary damages, which could include treble damages for any
infringement that is determined to be willful. Although QSI could seek a license
to sell products determined to infringe any third party patent, there can be no
assurance that a license would be available on terms acceptable to the Company,
if at all. The Company could also attempt to redesign any infringing products so
as to avoid infringement, although any effort to do so could be expensive and
time consuming, and there is no assurance the effort would be successful.
Subsidiary
On February 16, 1996 the Company acquired certain assets of AMA
MicroElectronics Pty. Ltd. ("AWAM"), a subsidiary of AWA Limited based in
Sydney, Australia. The AWAM assets that were acquired by a new subsidiary of the
Company, Quality Semiconductor Australia, Pty. Ltd. foundry business and product
design center. QSA did not provide a significant amount of production wafers for
its parent's (QSI) product lines during fiscal 1996.
Employees
At September 30, 1996, the Company had approximately 197 full-time
employees, including 34 in sales, marketing and customer support, 90 in
manufacturing, assembly and testing, 57 in research and product development, and
16 in finance and administration.
The Company's future success will depend to a large extent on the
continued contributions of Chun P. Chiu and R. Paul Gupta, who would be
difficult to replace. The future success of the Company also will depend on its
ability to attract and retain qualified marketing, technical and management
personnel, particularly highly skilled design, process and test engineers, for
whom competition is intense. The loss of or failure to attract and retain any
such persons could delay product development cycles or otherwise have a material
adverse effect on the Company's business. The Company has never had a work
stoppage and no employee is represented by a labor organization. The Company
considers its employees relations to be good.
<PAGE>
Officers and Directors of the Registrant
The officers and directors of the Company and their ages as of
September 30, 1996 are as follows:
Name Age Position
Chun P. Chiu 55 Chairman of the Board of Directors and
Chief Technical Officer
R. Paul Gupta 59 President and Chief Executive Officer
Stephen H. Vonderach 62 Vice President of Finance,
Chief Financial Officer and Secretary
Jacob Foraker 45 Vice President Logic and Memory Products
Albert Enamait 57 Vice President of Sales and Marketing
Edward J. Bradley, Jr. 53 Vice President of Manufacturing Operations
Andrew J. S. Kang 45 Director
Manohar L. Malwah 49 Director
Robert L. Puette 55 Director
Masaharu Shinya 53 Director
David D. Tsang 54 Director
Mr. Chiu, one of the Company's founders, has served as the Company's
Chairman of the Board since it's inception in 1988, Chief Executive Officer from
inception until March 1996 and President from inception until June 1994. In
March of 1996 he also became the company's Chief Technical Officer. In 1980, Mr.
Chiu co-founded Integrated Device Technology, Inc. ("IDT"), a semiconductor
manufacturer, and served in various management positions at IDT through 1988,
most recently as Director, Business Development for Japan and Far East. Mr.Chiu
holds an MSEE degree from Oregon State University and a BSEE degree from Waseda
University, Tokyo, Japan.
Mr. Gupta has served as Chief Executive Officer since March 1996, Chief
Operating Officer from February 1993 to March 1996 and as a director of the
Company since August 1995. He served as Vice President of Operations from August
1992 until June 1994. From 1988 to 1992, Mr. Gupta served as President of
Blackship Computers, a system integration company. Mr. Gupta holds a BSEE degree
from California State University-San Luis Obispo.
Dr. Malwah has served as a director since the Company's inception in 1988.
Dr. Malwah has been an independent consultant since October 1995. He served as
Senior Vice President from 1989 to June 1994, and as Chief Technical Officer
from 1989 to 1995. Dr. Malwah holds a Ph.D. In electrical engineering from the
University of Texas at Austin and an MS degree from Punjab University, India.
Mr. Vonderach has served as Vice President and Chief Financial Officer of
the Company since 1993. Mr. Vonderach has served as Secretary of the Company
since May 1995. From 1983 to 1993, Mr. Vonderach served as Vice President of
Finance and Chief Financial Officer of Appian Technology, a manufacturer of
application specific integrated circuits and high end graphics boards. Mr.
Vonderach holds a BBA degree from University of Pittsburgh and an MBA degree
from Pepperdine University.
<PAGE>
Mr. Jacob Foraker has served as the Company's Vice President Logic and
Memory Products since February 1996 and as Director of Business Development from
September 1995 to February 1996. Before joining the Company, Mr. Foraker worked
as a management consultant specializing in operations with his own consulting
firm and with Leemak. Mr. Foraker holds a B.A. degree from Widener University.
Mr. Albert Enamait has served as the Company's Vice President of Sales and
Marketing since July 1, 1996. From 1991 until 1996 Mr. Enamait was a consultant
with BJE Associates, an executive training and consulting firm. From 1989 to
1991, Mr. Enamait was Director, Worldwide Sales and Standard Product Marketing
for Raytheon Semiconductor, a semiconductor manufacturer.
Mr. Edward J. Bradley, Jr. joined the Company in January 1993. Before his
appointment to Vice President Marketing in February 1996, Mr. Bradley served as
Director, Manufacturing Operations. Prior to joining the Company, Mr. Bradley
was employed with Harris Semiconductor (formerly GE/Intersil), a semiconductor
manufacturer, where he held various positions in manufacturing management
including Operations Manager, Plant Manager and Director of Production Control
and Test Operations.
Mr. Kang has served as a director of the Company since 1992. Mr. Kang has
been President of Polytronix, Inc., a manufacturer of LCD devices in Richardson,
Texas, since 1992. In addition, Mr. Kang has been President of Technology
Associates Corporation, a Taiwanese venture capital management company, since
September 1990.
Mr. Puette has served as a director of the Company since 1992. Mr. Puette
has been the President and Chief Executive Officer of NetFRAME Systems, Inc., a
computer company, since 1994. From 1990 to 1993, Mr. Puette served as president
of Apple USA, a computer manufacturer. Prior to 1990, Mr. Puette served as a
group general manager of Hewlett-Packard Company, an electronics and systems
company. Mr. Puette also serves as a director of Cisco Systems, Inc., a
networking company and NetFRAME Systems, Inc., a computer company.
Mr. Shinya has served as a director of the Company since its inception in
1988. Mr. Shinya has served as President of Kanematsu Semiconductor Corporation,
a distributor of electronics products in Tokyo, Japan, since 1990. Kanematsu
Semiconductor Corporation is a subsidiary of Kanematsu Corporation, a large
Japanese trading house.
Mr. Tsang has been President and Chief Executive Officer of Oak Technology,
Inc. ("Oak") since he founded the company in July 1987 and a director of Oak
since October 1987. He has also served as Chairman of the Board of Directors of
Oak since January 1991. Mr. Tsang has also held the position of Chief Financial
Officer and Secretary of Oak. Mr. Tsang holds a BSEE degree in electrical
engineering from Brigham Young University and an MS degree in electrical
engineering from the University of Santa Clara.
<PAGE>
Item 2. Properties
The Company's headquarters and research and development activities are
located in Santa Clara, California, in a 50,000 square foot facility leased
through January 1998 (with certain renewal options), which includes
approximately 3,000 square feet of facilities for the Company's test operations.
The Company also leases a 41,000 square foot facility in Sydney, Australia
as a result of its acquisition of the wafer fabrication facility in February
1996. Included in this facility is a class 10 wafer fabrication area of
approximately 5,000 square feet, an assembly area of approximately 4,000 square
feet and a test area of approximately 3,000 square feet. In addition, the
Company has short-term leases for its four sales offices located in Irvine,
California; Atlanta, Georgia; Framingham, Massachusetts and Plano, Texas. The
Company believes that its existing facilities are adequate to meet its currently
foreseeable requirements.
Item 3. Legal Proceedings
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year covered by this report.
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Market for Common Stock
Quality Semiconductor, Inc.'s common stock is listed on NASDAQ
and is traded under the symbol "QUAL." The following table represents the high
and low sales prices for the Company's common stock for each quarter of fiscal
1996 and 1995.
---------------------------------
High Low
---------------------------------
1996
First Quarter $16.25 $5.50
- --------------------------------------------------------------------------------
Second Quarter 7.38 5.00
- --------------------------------------------------------------------------------
Third Quarter 9.00 5.00
- --------------------------------------------------------------------------------
Fourth Quarter 7.38 4.00
- --------------------------------------------------------------------------------
1995
First Quarter $13.50 $10.50
- --------------------------------------------------------------------------------
Second Quarter 13.50 10.00
- --------------------------------------------------------------------------------
Third Quarter 14.50 10.50
- --------------------------------------------------------------------------------
Fourth Quarter 18.50 12.25
- --------------------------------------------------------------------------------
The Company has never paid cash dividends and has no present intention to
pay cash dividends.
Holders of Record
As of September 30, 1996, there were 163 shareholders of record of the
Company's Common Stock.
<PAGE>
Item 6. Selected Financial Data
Years Ended September 30,
(In thousands, except per share data)
------------------------------------------------------
1996 1995 1994 1993 1992
------------------------------------------------------
REVENUES:
Net product revenues $44,688 $46,189 $36,247 $26,723 $14,200
- --------------------------------------------------------------------------------
Technology revenue __ __ 719 958 3,620
- --------------------------------------------------------------------------------
Total revenues ,688 46,189 36,966 27,681 17,820
- --------------------------------------------------------------------------------
Operating income (loss) (3,350) 6,386 5,189 3,122 (4,953)
- --------------------------------------------------------------------------------
Interest, net 77 520 (192) (377) (290)
- --------------------------------------------------------------------------------
Income (loss) benefit (2,015) 6,906 4,997 2,745 (5,243)
provision (benefit)
for taxes
- --------------------------------------------------------------------------------
Net income (loss) (1,310) 4,766 3,243 2,513 (5,404)
- --------------------------------------------------------------------------------
Net income (loss) $ (0.24) $ 0.84 $ 0.79 $ __ $ __
per share (1)
- --------------------------------------------------------------------------------
Weighted average 5,524 5,649 4,104 __ __
shares outstanding
- --------------------------------------------------------------------------------
Working capital $14,103 $27,379 8,460 5,857 3,277
- --------------------------------------------------------------------------------
Total assets 52,521 42,779 23,146 19,371 13,905
- --------------------------------------------------------------------------------
Long-term obligations 2,804 5 493 1,919 2,884
(less current portion)
- --------------------------------------------------------------------------------
Shareholders' equity 30,345 31,221 11,888 8,495 5,204
- --------------------------------------------------------------------------------
Dividends $ __ $ __ $ __ $ __ $ __
================================================================================
(1) Prior to 1994, statements of operations omit the historical net income
per share as it was not presented in the initial public offering registration
statement. Proforma net income is presented for 1994.
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
The following discussion should be read in conjunction with the five year
summary at selected financial data and the Company's Consolidated Financial
Statements and notes thereto.
ANNUAL RESULTS
The following table sets forth certain financial data from the Consolidated
Statements of Operations as a percentage of total revenues for the periods
indicated.
Years Ending September 30,
- --------------------------------------------------------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------
Total revenues 100% 100% 100%
- --------------------------------------------------------------------------------
Cost of revenues 67.6 50.9 49.3
- --------------------------------------------------------------------------------
Gross margin 32.4 49.1
50.7
- --------------------------------------------------------------------------------
Operating expenses
- --------------------------------------------------------------------------------
Research and development 15.7 13.7 12.8
- --------------------------------------------------------------------------------
Sales and marketing 15.6 14.8 16.5
General and administrative 9.0 6.8 7.4
Total operating expenses 40.3 35.3 36.7
- --------------------------------------------------------------------------------
Operating income (loss) (7.9) 13.8 14.0
- --------------------------------------------------------------------------------
Other income 3.2 -- --
- --------------------------------------------------------------------------------
Interest, net 0.2 1.1 (0.5)
- --------------------------------------------------------------------------------
Income (loss) before provision (4.5) 14.9 13.5
(benefit) for taxes
- --------------------------------------------------------------------------------
Provision (benefit) for taxes (1.6) 4.6 4.7
- --------------------------------------------------------------------------------
Net income (loss) (2.9)% 10.3% 8.8%
================================================================================
The Company has derived revenues principally from product revenues and
technology development and license revenues, as illustrated in the table below:
Years Ending September 30,
- --------------------------------------------------------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------
(in thousands)
- --------------------------------------------------------------------------------
Net product revenues $44,688 $46,189 $36,247
- --------------------------------------------------------------------------------
Technology development and
license revenues from related parties -- -- 719
- --------------------------------------------------------------------------------
Total revenues $44,688 $46,189 $36,966
================================================================================
Acquisition of Business
On February 16, 1996 the Company acquired certain assets of AWA
MicroelEctronics Pty. Ltd. ("AWAM"), a subsidiary of AWA Limited, based in
Sydney, Australia. The AWAM assets that were acquired by a new subsidiary of the
Company, Quality Semiconductor Australia, Pty. Ltd. ("QSA"), included a fully
operational wafer foundry business and product design center. In a separate
agreement, the Company has also signed a strategic alliance agreement with AWA
Limited, to jointly develop new products and technologies. The acquisition was
accounted for using the purchase method.
<PAGE>
The net purchase price of the AWAM facility was $11.8 million, consisting
of $5.0 million cash, $6.3 million present value of redeemable preference
shares, of QSA fair value of warrants of $65,000, and acquisition costs of
approximately $400,000. The allocation of the purchase price, based upon an
independent valuation, consisted of $8.8 million of net tangible assets and $3.0
million of intangible assets which were related to assembled workiforce,
customer base, and goodwill, which are being amortized over five years. As of
September 30, 1996, the Company had incurred approximately $375,000 of
amortization expense. AWA Limited was issued 1,000 redeemable preferred shares
at an issue price of $1,125 per share. The shares may be put by AWA Limited back
to QSA beginning July, 1997 pursuant to the terms of a put option deed dated
January 12, 1996. These redeemable preference shares of QSA have been
categorized as debt on the balance sheet and discounted to the present value.
Between July 1997 and July 1999, the Company will make the final payment of a
minimum of approximately $7.0 million up to a maximum of approximately $7.8
million. QSA's results of operations have been included in the consolidated
results of operations since the date of acquisition. See Note 3 of Notes to
Consolidated Financial Statements.
Total Revenues
Total revenues in fiscal 1996 were $44.7 million, decreasing by 3% over
total revenues in fiscal 1995. This compares with an increase of total revenues
of 25% in fiscal 1995 over fiscal 1994. Net product revenues were up by 27% in
fiscal 1995 over fiscal 1994. The decrease in year-over-year total revenues was
mainly due to a substantial decline in the overall average selling prices
partially offset by sales for QSA. The Company expects that the average selling
prices of its products generally will continue to decline over the lives of such
products. Sales of interface logic devices are expected to continue to account
for a significant majority of net product revenues in the foreseeable future. To
increase revenues, the Company seeks to increase unit sales of existing
products, principally by reducing prices, and to introduce and sell new
products. No assurance can be given that these efforts will be successful.
As is common in the semiconductor industry, the Company sells a significant
portion of its products through distributors. Domestic distributors accounted
for approximately, 26%, 21% and 30% of the Company's total product revenues
during fiscal 1996, 1995 and 1994, respectively. Sales by Arrow Electronics Inc.
accounted for approximately, 19%, 16% and 21% of total product revenues during
fiscal 1996, 1995 and 1994, respectively, and the remainder of domestic
distributor sales were made primarily through Bell Microproducts Inc. ("Bell")
and Nu-Horizons Electronics Corp. The relationship with Bell was terminated in
fiscal 1995 and the Company replaced Bell with Bell Industries, Inc. late in the
year. Recognition of sales to distributors and the related cost of sales is
deferred until such distributors resell the products to their customers. There
can be no assurance that future sales by distributors will continue at the
present levels. The loss of one or more distributors could have a material
adverse effect on the Company's operating results.
The Company has received technology development and license revenues from
it's wafer fabrication suppliers in connection with certain new product
development projects and licenses for QCMOS process technology and certain
product designs. Technology development and license revenues, which included
cash payments and the market value of free wafers provided to the Company,
constituted 2% of the net revenues in fiscal 1994. There was no technology
development and license revenue in fiscal 1996 and 1995. Although the Company
may accept business involving technology development and license revenues, the
Company does not expect these revenues to constitute a significant portion of
net revenues in future periods.
Export sales, primarily consisting of sales to countries in Europe and the
Far East, constituted 38%, 29% and 21% of net product revenues for fiscal 1996,
1995 and 1994, respectively.
<PAGE>
Gross Margin on Product Revenue
The following table sets forth the Company's net product revenues and
product gross margin:
Years Ended September 30,
- --------------------------------------------------------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------
(In thousands, except percentage data)
- --------------------------------------------------------------------------------
Net product revenues $44,688 $46,189 $36,247
- --------------------------------------------------------------------------------
Cost of product revenues 30,226 23,524 18,192
- --------------------------------------------------------------------------------
Product gross margin $14,462 $22,665 $18,055
- --------------------------------------------------------------------------------
Product gross margin a
percentage of net product revenues 32.4% 49.1% 49.8%
================================================================================
The Company's cost of product revenues includes the cost of wafer
fabrication, assembly performed by third party vendors, testing by third party
vendors and direct and indirect costs associated with the testing, procurement,
scheduling and quality assurance functions performed by the Company.
Gross margin in fiscal 1996 was 32% of net product revenues, compared with
49% of net product revenues in fiscal 1995, and 50% of net product revenues in
1994. The decline from fiscal 1996 to 1995 in gross margin resulted principally
from the recording of $2,840,000 in inventory write-downs resulting from changes
in the product mix and reduced OEM demand. Additionally, gross margin was
impacted by lower average selling prices, changes in product mix, lower OEM
demand and absorption of fixed costs at QSA. This margin erosion was offset in
part by the Company's cost reduction programs. The decline in gross margin from
fiscal 1994 to 1995 primarily reflects increased costs resulting from the
unfavorable exchange rate on yen-based wafer purchases, changes in product mix
and lower average selling prices which were partially offset by cost reductions.
The Company purchases some of its wafers in yen-denominated transactions and is
subject to exchange rate risk. The Company attempts to manage its exposure to
this risk by entering into forward exchange contracts to hedge its
yen-denominated firm purchase commitments.
The Company's quarterly revenues and operating results have varied
significantly in the past and are likely to vary substantially from quarter to
quarter in the future. The Company's operating results are affected by a wide
variety of factors, many of which are outside of the Company's control,
including but not limited to, economic conditions and overall market demand in
the United States and worldwide, the Company's ability to introduce new products
and technologies on a timely basis, changes in product mix, fluctuations in
manufacturing costs which affect the Company's gross margins, declines in market
demand for the Company's and its customers' products, sales timing, the level of
orders which are received and can be shipped in a quarter, the cyclical nature
of both the semiconductor industry and the markets addressed by the Company's
products, product obsolescence, price erosion, and competitive factors. The
Company's operating results in fiscal 1997 are likely to be affected by these
factors as well as others.
The Company must order wafers and build inventory well in advance of
product shipments. Because the Company's markets are volatile and subject to
rapid technology and price changes, there is a risk that the Company will
forecast incorrectly and produce excess or insufficient inventories of
particular products. This inventory risk is heightened because many of the
Company's customers place orders with short lead times. In the third quarter of
fiscal 1996 these factors caused the Company to have a $2.8 million inventory
writedown. These factors increase not only the inventory risk but also the
difficulty of forecasting quarterly operating results. Moreover, as is common in
the semiconductor industry, the Company frequently ships more product in the
third month of each quarter than in either of the first two months of the
quarter, and shipments in the third month are higher at the end of that month.
The concentration of sales in the last month of the quarter contributes to the
difficulty in predicting the Company's quarterly revenues and results of
operations.
<PAGE>
The Company's products are in various stages of their product life cycles.
The Company's success is highly dependent upon its ability to develop complex
new products, to introduce them to the marketplace ahead of the competition, and
to have them selected for design into products of leading system manufacturers.
These factors have become increasingly important to the Company's results of
operations because the rate of change in the markets served by the Company
continues to accelerate. Since product life cycles are continually becoming
shorter, revenues may be affected quickly if new product introductions are
delayed or if the Company's products are not designed into successive
generations of products of the Company's customers.
The Company's gross margins also will depend on the Company's success at
introducing and ramping production of new products quickly and effectively
because the gross margins of semiconductor products decline as competitive
products are introduced. Also, the Company must deliver product to customers
according to customer schedules. Delays in new product introductions could
affect revenues and gross margins for current and follow-on products if
customers shift to competitors to meet their requirements.
As a result of the above factors, gross margin fluctuations are difficult
to predict, and there can be no assurance that the Company will maintain gross
margins at current levels in future periods. To offset this margin pressure, the
Company seeks to reduce costs by improving wafer yields, negotiating price
restrictions with suppliers, and achieving economies of scale by means of higher
production levels. The Company also seeks to offset margin erosion by selling a
higher percentage of new products, which tend to have higher margins than more
mature products. No assurance can be given that these efforts will be
successful.
Research and Development
The Company's research and development activities include process
development and new product development. Research and development expenditures
in fiscal 1996 were $7.0 million, or 16% of total revenues, compared with $6.3
million, or 14% of total revenues in fiscal 1995, and $4.7 million, or 13% of
total revenues in fiscal 1994. This increase in fiscal 1996 was mainly the
result of costs associated with the development of new products and processes
and the added costs of the development group located at QSA. The Company
believes that the continued development of its process technology and new
products is essential to its success and is committed to continue its investment
in research and development to maintain a strong technological position in the
industry. No research and development expense has been capitalized. The Company
currently expects to incur higher research and development expenses in fiscal
1997.
The Company believes that future product revenue growth will depend in
substantial part on the success of new products and the continued success and
sales of existing products. New products are generally incorporated into a
customer's product or system at the design stage. However, design wins, which
can often require significant expenditures by the Company, may precede the
generation of volume sales, if any, by a year or more. No assurance can be given
that the Company will achieve design wins or that any design win will result in
significant future revenues.
Sales and Marketing
Sales and marketing expenditures in fiscal 1996 were $7.0 million, or 16% of
total revenues, compared with $6.8 million, or 15% of total revenues in fiscal
1995, and $6.1 million, or 16% of total revenues in fiscal 1994. Sales and
marketing expenditures in fiscal 1996 increased slightly from fiscal 1995 due to
increases in advertising and promotional expenses, payroll related expenses and
travel, partially offset by lower sales commissions. The sales and marketing
expense increase in fiscal 1995 was due primarily to increased commission
expense resulting from higher revenues in fiscal 1995. The Company expects to
incur higher sales and marketing expenses in fiscal 1997, although these
expenses
<PAGE>
are expected to decrease as a percentage of revenues. However, there can be no
assurance that the revenues will grow at the same rate as expenditures for sales
and marketing are incurred.
General and Administrative
General and administrative expenditures in fiscal 1996 were $4.0 million,
or 9% of total revenues, compared with $3.1 million, or 7% of total revenues in
fiscal 1995, and $2.7 million, or 7% of total revenues in fiscal 1994. General
and administrative expenditures in fiscal 1996 increased mainly due to the added
costs of the Australian subsidiary, and legal costs related to patent
prosecution and defense. The increase in general and administrative expenses in
fiscal 1995 were due mainly to costs associated with being a public company and
compensation expenses. The Company expects to incur higher general and
administrative expenses in fiscal 1997, although these expenses are expected to
decrease as a percentage of revenues. However, there can be no assurance that
revenues will continue to grow at the same rate as expenditures for general and
administrative expenses are incurred.
Other Income
Other income of $1.4 million in fiscal 1996 was earned as a result of
engineering and marketing services provided by the Company pursuant to an
agreement with AWA Limited. The Company has completed the services under the
agreement with AWA Limited and does expect this other income to continue in
future periods.
Interest, Net
Net interest income in fiscal 1996 was $77,000 compared to $520,000 in
fiscal 1995. The decrease in fiscal 1996 was mainly due to a decrease in cash
and cash equivalents and short-term investments used for the purchase of AWAM
assets in February 1996 and increased interest expense associated with notes
payable for the purchase of capital equipment and interest expense incurred with
the redeemable preference shares issued to AWAM. The net interest income of
$520,000 in fiscal 1995 was mainly due to interest earned on the proceeds from
the Company's initial public offering in November 1994 as compared to net
interest expense of $192,000 in fiscal 1994 due primarily to interest on leases
and other long-term obligations.
Provision (Benefit) for Taxes
The Company recorded a tax benefit for its fiscal 1996 losses based on
available carryback potential. The Company's effective tax rate was 35%, 31% and
35% for fiscal 1996, 1995 and 1994, respectively. The decrease in the effective
tax rate in fiscal 1995 was due primarily to the recognition of deferred tax
assets previously subject to valuation allowances.
Financial Condition, Liquidity and Capital Resources
Since its inception, the Company has financed its operations and investment
in property, plant and equipment primarily through the sale of equity
securities, debt issuance and technology development and license fees. Total
assets increased $9.9 million to a total of $52.5 million at year end. Cash,
cash equivalents, and short-term investments decreased $9.8 million; accounts
receivable increased $778,000; property and equipment, net increased $14.2
million; and goodwill and other assets increased $2.8 million; current
liabilities increased $6.1 million; long-term obligations to a related party
increased to $2.8 million; deferred tax liabilities increased $1.7 million; and
shareholders equity decreased $876,000.
<PAGE>
The decrease in cash, cash equivalents and short-term investments was
primarily due to cash paid for the acquisition of certain assets of Awam of $5.0
million, cash used in operating activities of $502,000 and $7.0 million utilized
for the purchase of wafer fabrication equipment at QSA and other capital
equipment purchased during fiscal 1996, compared to $2.2 million in fiscal 1995.
The proceeds utilized for the purchase of the wafer fabrication equipment was
partially offset by the receipt of $3.7 million from notes payable issued to a
related party ($2.8 million recorded as long-term debt at September 30, 1996).
See Note 3 and 4 of Notes to Consolidated Financial Statements.
Accounts receivable increased at September 30, 1996 mainly due to a greater
portion of net revenues generated in the last month of the fourth quarter as
compared to fiscal 1995.
The increase in other assets was primarily due to the allocation of the
purchase price of certain assets of AWAM which included approximately $3.0
million allocated as the value of the assembled workforce, customer base and
goodwill. This amount is being amortized over a five year period and
approximately $375,000 was included as amortization expense in fiscal 1996.
Current liabilities increased $6.1 million in fiscal 1996 due primarily to
the issuance of $7.0 million in redeemable preference shares of QSA which were
issued as partial consideration for the acquisition of AWAM assets. In December
1996 the Company negotiated revised payment terms which would defer payment of
approximately $4.0 million due for the redemption of the redeemable preference
shares until January 1998. The increase in deferred tax liabilities resulted
from the acquisition of certain assets of Awam due to the difference in tax and
financial accounting treatment of certain assets of AWAM.
In November 1996, the Company negotiated a private placement of unsecured,
convertible promissory notes in the principal amount of $5 million, of QSA. The
Company received $3 million of the total financing, by December 1996, and
anticipates receiving the remaining balance no later than February 28, 1997. The
Company intends to use the proceeds for payment on the debt incurred in
connection with the acquisition of certain assets of Awam, general corporate
purposes and working capital. See Note 10 of Notes to Consolidated Financial
Statements.
The Company believes that current available cash, short-term investments,
cash generated from operations, and credit arrangements will be sufficient to
finance the Company's anticipated operations and capital equipment requirements
through at least the next twelve months. However, there can be no assurance that
events in the future will not require the Company to seek additional capital
sooner or, if so required, that adequate capital will be available on terms
acceptable to the Company.
Employees
The number of Company employees grew 44% during fiscal 1996 mainly due to
the acquisition of QSA. The Company had 197 employees at the end of fiscal 1996
as compared to 137 at the end of the prior fiscal year.
Impact on Currency and Inflation
The Company makes yen-denominated purchases of wafers from Japanese
suppliers. In fiscal year 1995 this resulted in material unfavorable foreign
exchange transactions included in cost of product revenues. The Company entered
into forward exchange contracts beginning in the fourth quarter of fiscal 1995
primarily to hedge against the short-term impact of foreign currency
fluctuations on purchases denominated in yen. The maturities of forward exchange
contracts are short-term in nature. Notwithstanding these precautions however,
the Company remains subject to the transaction exposures that arise from foreign
exchange movements between the dates of when foreign currency purchase
transactions are recorded and the dates cash payments are made in foreign
currencies. Inflation has not had a significant impact on the Company.
<PAGE>
Additional Factors That May Affect Results
The Company's quarterly and annual operating results are affected by a wide
variety of factors that could materially and adversely affect revenues and
profitability, including, among others, factors pertaining to (i) competition,
such as competitive pressures on average selling prices of the Company's
products and the introduction of new products by competitors; (ii) the current
and anticipated future dependence on the Company's existing product lines; (iii)
new product development, such as increased research, development and marketing
expenses associated with new product introductions, the Company's ability to
introduce new products and technologies on a timely basis and the amount and
timing of recognition on non-recurring development revenue; (iv) manufacturing
and operations, such as fluctuations in manufacturing yields, inventory
management, raw materials, and production and assembly capacity; (v) the Company
operates a wafer fabrication facility which involves significant risks typically
inherent in any manufacturing endeavor, as well as additional risks associated
with production yields, technical difficulties with process control, expenses
associated with responding to increases in environmental polution regulation or
disposal of environmentally hazardous waste and events limiting production, such
as fires or other damage; (vi) expenses that may be incurred in obtaining,
enforcing and defending claims with respect to intellectual property rights;
(vii) sales and marketing, such as loss of significant distributor,
concentration of customers, and volume discounts that may be granted to
significant customers; (viii) customer demand, such as market acceptance of
products, the timing, cancellation or delay of customer orders and general
economic conditions in the semiconductor and electronic systems industries, as
well as other factors, such as risks associated with doing business abroad,
retention of key personnel and management of growth and volatility in the
Company's revenues and stock price.
The Company's earnings and stock price have been, and may be subject to
significant volatility, particularly on a quarterly basis. Any shortfall in
revenue, gross margins or earnings from expected levels could have an immediate
and significant adverse effect on the trading price of the Company's stock in
any given period. The Company may not learn of, or be able to confirm revenue,
gross margin or earnings shortfalls until late in the quarter, or following the
end of the quarter, because a significant portion of the Company's revenue in a
quarter typically is shipped in the last few weeks of that quarter. In addition,
future announcements concerning the Company or its competitors, including
technological innovations, new product introductions, governmental regulations,
litigation, or changes in earnings estimates by analysts, may cause the market
price of the Company's stock to fluctuate substantially. Stock prices for many
technology companies fluctuate widely for reasons that may be unrelated to
operating results, such as general economic, political and market conditions.
Cautionary Statement Concerning Forward Looking Statements
This report contains certain forward-looking statements that are subject to
risks and uncertainties. For such statements the Company claims the protection
of the safe harbor for forward looking statements contained in the Rule 3b-6
under the Securities Exchange Act of 1934, Securities Act Release No. 6084 (June
25, 1979) and the Private Securities Litigation Reform Act of 1995. The
following important factors, in addition to those discussed elsewhere in the
report, could cause the results to differ materially from those expressed in
such forward looking statements. The Company's products are in various stages of
their product life cycles. The Company's success is highly dependent upon its
ability to develop new products, to introduce them to the marketplace ahead of
the competition, and to have them selected for design into products of leading
systems manufacturers. These factors have become increasingly important to the
Company's results of operations because the rate of change in the dynamic
markets served by the Company continues to accelerate. Since product life cycles
are continually becoming shorter, revenue may be affected quickly if new product
introductions are delayed. Since the gross margins of semiconductor products
typically decline as competitive products are introduced, both revenue and
profitability are impacted by the Company's success in introducing new products
quickly. Also, the Company must deliver product to customers according to
customer schedules. If delays occur, then revenue and gross margins for current
and follow-on products may be affected as customers may shift to competitors to
meet their requirements. There can be no assurance that the Company will
continue to compete successfully because of these factors.
<PAGE>
Item 8. Financial Statements and Supplementary Data
Index to Consolidated financial Statements
Page
Financial Statements:
Consolidated Balance Sheets as of September 30, 1996 28
and September 30, 1995
Consolidated Statements of Operations for Fiscal Years 29
Ended September 30, 1996, September 30, 1995,
and September 30, 1994
Consolidated Statements of Cash Flows for Fiscal Years 30
Ended September 30, 1996, September 30, 1995,
and September 30, 1994
Consolidated Statements of Shareholders' Equity 31
for Fiscal Years Ended
Notes to Consolidated Financial Statements 32
Report of Independent Accountants 44
<PAGE>
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
September 30,
- --------------------------------------------------------------------------------
1996 1995
- --------------------------------------------------------------------------------
Assets - Current Assets:
- --------------------------------------------------------------------------------
Cash and cash equivalents $4,930 $7,637
Short-term investments 2,403 9,480
Accounts receivable, net of allowances of $173
and $123 at September 30, 1996 and 1995 5,940 5,851
- --------------------------------------------------------------------------------
Accounts receivable from related parties 689 --
Other receivables 719 996
- --------------------------------------------------------------------------------
Inventories 13,984 12,610
- --------------------------------------------------------------------------------
Prepaid expenses 532 466
Deferred tax assets 2,239 1,609
================================================================================
Total current assets 31,436 38,649
- --------------------------------------------------------------------------------
Property and equipment, net 18,079 3,886
Goodwill and other assets 3,006 244
Total assets $52,521 $42,779
================================================================================
Liabilities and Shareholders' Equity - Current liabilities:
- --------------------------------------------------------------------------------
Accounts payable $2,749 $2,892
Accounts payable to related parties 747 2,011
Accrued compensation 1,212 1,167
Other accrued liabilities 1,039 424
Income taxes payable 1,707 2,070
Deferred rent 201 303
Deferred income on shipments to distributors 2,018 1,898
Capital lease obligations due within one year -- 194
Long-term obligations to related party due 667 311
within one year
Redeemable preference shares of subsidiary 6,993 --
Total current liabilities 17,333 11,270
- --------------------------------------------------------------------------------
Capital lease obligations -- 5
- --------------------------------------------------------------------------------
Long-term obligations to related party 2,840 --
Deferred tax liabilities 2,003 283
Commitments and Contingencies - Shareholders' equity:
- --------------------------------------------------------------------------------
Preferred stock, $.001 par value: Authorized--1,000,000;
Issued and outstanding--none -- --
- --------------------------------------------------------------------------------
Common stock, $.001 par value: Authorized--25,500,000;
Issued and outstanding--5,536,000 and 5,475,000 5 5
- --------------------------------------------------------------------------------
Additional paid in capital 28,348 28,386
Retained earnings 2,412 3,478
Deferred compensation (420) (648)
================================================================================
Total shareholders' equity 30,345 31,221
================================================================================
Total liabilities and shareholders' equity $52,521 $42,779
================================================================================
See accompanying notes to consolidated financial statements.
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Years Ended September 30,
- --------------------------------------------------------------------------------
1996 1995 1994
Revenues:
Net product revenues $44,688 $46,189 $36,247
- --------------------------------------------------------------------------------
Technology development and license revenues
from related parties -- -- 719
================================================================================
Total revenues 44,688 46,189 36,966
- --------------------------------------------------------------------------------
Cost of revenues:
- --------------------------------------------------------------------------------
Cost of product revenues 30,226 23,524 18,192
Cost of technology development -- -- 40
license revenues
================================================================================
Total cost of revenues 30,226 23,524 18,232
- --------------------------------------------------------------------------------
Gross margin 14,462 22,665 18,734
Operating expenses:
- --------------------------------------------------------------------------------
Research and development 6,982 6,326 4,722
Sales and marketing 6,986 6,808 6,096
General and administrative 4,024 3,145 2,727
================================================================================
Total operating expenses 17,992 16,279 13,545
- --------------------------------------------------------------------------------
Operating income (loss) (3,530) 6,386 5,189
Other income 1,438 -- -- --
- --------------------------------------------------------------------------------
Interest income 510 678 126
Interest expense (433) (158) (318)
Income (loss) before provision (benefit) (2,015) 6,906 4,997
for taxes
Provision (benefit) for taxes (705) 2,140 1,754
================================================================================
Net income (loss) $(1,310) $4,766 $3,243
================================================================================
Net income (loss) per share $(0.24) $ 0.84 $ 0.79
Shares used in computing per share amounts 5,524 5,649 4,104
================================================================================
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Years Ended September 30,
1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------
Operating Activities
<S> <C> <C> <C>
Net income (loss) $(1,310) $4,766 $3,243
- -------------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Depreciation and amortization 3,977 2,305 1,558
- -------------------------------------------------------------------------------------------------------------------
Deferred income taxes, net (1,021) (676) (650)
- -------------------------------------------------------------------------------------------------------------------
Deferred compensation amortization 228 228 109
- -------------------------------------------------------------------------------------------------------------------
Changes in operating assets and liabilities:
Accounts and related parties receivable, net (778) (2,096) (582)
- -------------------------------------------------------------------------------------------------------------------
Other receivables 277 (939) (12)
- -------------------------------------------------------------------------------------------------------------------
Inventories (510) (3,973) (3,212)
Prepaid expenses (66) 345 (590)
- -------------------------------------------------------------------------------------------------------------------
Accounts payable including related parties (1,407) 1,008 942
- -------------------------------------------------------------------------------------------------------------------
Income taxes payable (282) 1,006 920
Accrued compensation (536) (71) 372
Other accrued liabilities and deferred rent 806 (138) (366)
- -------------------------------------------------------------------------------------------------------------------
Deferred income on shipments to distributors 120 39 (197)
===================================================================================================================
Total adjustments 808 (2,962) (1,708)
===================================================================================================================
Net cash provided by (used in) operating activities (502) 1,804 1,535
- -------------------------------------------------------------------------------------------------------------------
Investing Activities
Purchase of certain assets of Awam (5,005) -- --
- -------------------------------------------------------------------------------------------------------------------
Capital expenditures (6,964) (2,161) (1,272)
Purchase of short-term investments (5,935) (109,744) --
Sales and maturities of short-term investments 13,012 100,264 --
- -------------------------------------------------------------------------------------------------------------------
Deposits and other assets (126) 50 353
===================================================================================================================
Net cash used in investing activities (5,018) (11,591) (919)
- -------------------------------------------------------------------------------------------------------------------
Financing Activities
Principal payments on capital lease obligations (199) (276) (276)
- -------------------------------------------------------------------------------------------------------------------
Principal payments on long-term debt (472) (1,148) (1,010)
- -------------------------------------------------------------------------------------------------------------------
Proceeds from notes payable to related party 3,668 -- --
Net proceeds from issuance of common stock 635 14,328 40
- -------------------------------------------------------------------------------------------------------------------
Repurchase of common stock (819) -- --
- -------------------------------------------------------------------------------------------------------------------
Proceeds from reduction in notes receivable from shareholders -- 11 1
===================================================================================================================
Net cash provided by (used in) financing activities 2,813 12,915 (1,245)
===================================================================================================================
Net increase (decrease) in cash and cash equivalents (2,707) 3,128 (629)
- -------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of period 7,637 4,509 5,138
===================================================================================================================
Cash and cash equivalents at end of period $4,930 $7,637 $4,509
===================================================================================================================
Supplemental Disclosures of Cash Flow Information Cash paid during this period
for:
- -------------------------------------------------------------------------------------------------------------------
Interest $107 $195 $302
- -------------------------------------------------------------------------------------------------------------------
Taxes $724 $1,442 $1,438
- -------------------------------------------------------------------------------------------------------------------
Supplemental Disclosures of Noncash Investin and Financing Activities Redeemable
preference shares of a subsidiary issued as partial consideration for QSA
- -------------------------------------------------------------------------------------------------------------------
$6,300 -- --
- -------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands)
Notes
Convertible Additional Retained Receivable Total
Preferred Stock Common Stock Paid in Earnings Deferred From Shareholder
Shares Amount Shares Amount Capital (Deficit)Compensation Shareholders Equity
===========================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1993 2,176 $2 1,267 $1 $13,168 $(4,531) $(133) $(12) $8,495
===========================================================================================================================
Sale of common stock for cash -- -- 48 1 39 -- -- -- 40
- ---------------------------------------------------------------------------------------------------------------------------
Repayment of notes receivable -- -- -- -- -- -- -- 1 1
- ---------------------------------------------------------------------------------------------------------------------------
Deferred compensation related
to stock options -- -- -- -- 852 -- (852) -- --
- ---------------------------------------------------------------------------------------------------------------------------
Amortization of deferred
compensation -- -- -- -- -- -- 109 --- 109
- ---------------------------------------------------------------------------------------------------------------------------
Net Income -- -- -- -- -- 3,243 -- -- 3,243
===========================================================================================================================
Balance at September 30, 1994 2,176 2 1,315 2 14,059 (1,288) (876) (11) 11,888
===========================================================================================================================
Conversion of preferred stock
to common stock (2,176) (2) 2,176 2 -- -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------------
Sale of common stock for cash -- -- 1,984 1 14,327 -- -- -- 14,328
- ---------------------------------------------------------------------------------------------------------------------------
Repayment of notes receivable -- -- -- -- -- -- -- 11 11
- ---------------------------------------------------------------------------------------------------------------------------
Amortization of deferred
compensation -- -- -- -- -- -- 228 -- 228
- ---------------------------------------------------------------------------------------------------------------------------
Net income -- -- -- -- -- 4,766 -- -- 4,766
===========================================================================================================================
Balance at September 30, 1995 -- -- 5,475 5 28,386 3,478 (648) -- 31,221
===========================================================================================================================
Sale of common stock for cash -- -- 196 1 634 -- -- -- 635
- ---------------------------------------------------------------------------------------------------------------------------
Tax benefit from stock option
exercises -- -- -- -- 81 -- -- -- 81
- ---------------------------------------------------------------------------------------------------------------------------
Repurchase of common stock -- -- (135) (1) (818) -- -- -- (819)
- ---------------------------------------------------------------------------------------------------------------------------
Insurance of warrants -- -- -- -- 65 -- -- -- 65
Amortization of deferred
compensation -- -- -- -- -- -- 228 -- 228
- ---------------------------------------------------------------------------------------------------------------------------
Translation adjustment -- -- -- -- -- 244 -- -- 244
- ---------------------------------------------------------------------------------------------------------------------------
Net loss -- -- -- -- -- (1,310) -- -- (1,310)
===========================================================================================================================
Balance at September 30, 1996 -- $-- 5,536 $5 $28,348 $2,412 $(420) -- $30,345
===========================================================================================================================
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
Notes to Consolidated Financial Statements
1. Organization and Summary of Significant Accounting Policies
Quality Semiconductor, Inc. (the Company), a California corporation, is
engaged in designing and marketing high performance CMOS logic memory integrated
circuit products. The company targets systems manufacturers principally in
networking, personal computers and workstations, and telecommunications markets.
The Company's operating results are subject to a variety of risks
characteristic of the semiconductor industry, including booking and shipment
uncertainties, wafer yield fluctuations, and price erosion, as well as general
economic conditions.
Basis of Presentation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiary Quality Semiconductor Australia, Pty., Ltd.
("QSA") All significant intercompany accounts and transactions have been
eliminated in consolidation.
The Company's fiscal year ends on the last Sunday in September. Fiscal
years 1996, 1995, and 1994 ended on September 29, 24, and 25, respectively. The
Company's fiscal quarters end on the last Sunday of each calendar quarter. For
convenience, the accompanying consolidated financial statements have been shown
as ending on the last day of the calendar month.
The Company uses the local currency as its functional currency for QSA.
Translation adjustments, which result from the process of translating foreign
currency financial statements into U.S. dollars are included in shareholders'
equity.
Impact of Recently Issued Accounting Standards
In March 1995, the Financial Accounting Standards Board issued Statement
No. 121 ("FAS 121"), "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets Disposed Of," which requires impairment losses to be recorded
on long-lived assets used in operations when indicators of impairment are
present and the undiscounted cash flows estimated to be generated by those
assets are less than the assets' carrying amounts. FAS 121 also addresses the
accounting for long-lived assets that are expected to be disposed of. The
Company adopted FAS 121 in 1996 and the implications did not have a material
impact on the Company's financial condition or results of operations.
In October 1995, the Financial Accounting Standards Board issued a
Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for
Stock-Based Compensation. SFAS No. 123 will be effective for fiscal years
beginning after December 15, 1995, and will require that the Company either
recognize in its financial statements costs related to its employee stock-based
compensation plans, such as stock option and stock purchase plans, or make pro
forma disclosures of such costs in a footnote to the financial statements.
The Company expects to continue to use the intrinsic value method of
Accounting Principles Board Opinion No. 25, as allowed under SFAS No. 123, to
account for all of its employee stock-based compensation plans. Therefore, in
its consolidated financial statements for fiscal 1997, the Company will make the
required pro forma disclosures in a footnote. SFAS No. 123 is not expected to
have a material effect on the Company's results of operations or financial
position.
<PAGE>
Use of Estimates
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ materially from estimates.
Cash Equivalents and Short-Term Investments
Management determines the appropriate classifications of debt securities at
the time of purchase and reevaluates such designations as of each balance sheet
date. Marketable equity securities and debt securities are classified as
available-for-sale. Available-for-sale securities are carried at fair value,
with the unrealized gains and losses, net of tax, reported in a separate
component of shareholders' equity. The amortized cost of debt securities in this
category is adjusted for amortization of premiums and accretion of discounts to
maturity. Such amortization is included in investment income. Realized gains and
losses and declines in value judged to be other-than-temporary on
available-for-sale securities are included in interest income. The cost of
securities sold is based on the specific identification method. Interest and
dividends on securities classified as available-for-sale are included in
interest income.
All short-term investments, by contractual maturity, mature in less than
one year. The fair value of available-for-sales short-term investments held at
September 30, 1996 and 1995 are summarized as follows (in thousands):
Estimated Fair Values
- --------------------------------------------------------------------------------
1996 1995
- --------------------------------------------------------------------------------
Money Market $ 43 $ 58
- --------------------------------------------------------------------------------
Commercial paper 2,437 3,510
- --------------------------------------------------------------------------------
State and municipal obligations 3,430 10,416
- --------------------------------------------------------------------------------
$5,910 $13,984
================================================================================
- --------------------------------------------------------------------------------
Amounts included in cash and cash equivalents $3,476 $ 4,258
- --------------------------------------------------------------------------------
Amounts included in short-term investments 2,403 9,480
Amounts included in other (interest) 31 246
- --------------------------------------------------------------------------------
$5,910 $13,984
================================================================================
Both gross unrealized gains and losses as of September 30, 1996 and 1995
and realized gains and losses on sales of securities for the year ended
September 30, 1996 and 1995 were immaterial. At September 30, 1996 and 1995,
fair market value approximates amortized cost. Maturities and proceeds from
sales of short-term investment securities were approximately $13 and $100
million, respectively, during the years ended September 30, 1996 and 1995.
Revenue Recognition and Deferred Revenue
Revenue from product sales to customers other than sales to distributors
are recorded when products are shipped. Sales made to distributors, under
agreements allowing price protection and right of return on merchandise unsold
by the distributors, are deferred until the merchandise is sold by the
distributors.
During 1994 the Company had agreements under which it receives fees for
certain rights to technology and products currently under development. Revenues
associated with these technology development and license agreements are
recognized using the percentage-of-completion method.
<PAGE>
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization
are computed using the straight-line method over the assets` estimated useful
lives of two to ten years. Capitalized leases and leasehold improvements are
amortized using the straight-line method over the shorter of the useful lives of
the assets or the terms of the lease.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents. The Company is
exposed to credit risk in the event of default by the financial institutions to
the extent of amounts recorded on the balance sheet.
Inventories
Inventories are stated at the lower of standard cost which approximates
actual (first-in, first out method) or market (estimated net realizable value).
The Company's inventory valuation process is done on a part-by-part basis.
Lower of cost to market adjustments, specifically identified on a part-by-part
basis, reduce the carrying value of the related inventory and takes into
consideration reductions of sales prices, excess inventory levels and obsolete
inventory. Once established, these adjustments are considered permanent and are
not reversed until the related inventory is sold or disposed. During the third
quarter of fiscal 1996 the Company wrote down $2.8 million of inventory.
The Company produces inventory based on orders received and forecasted
demand. The Company must order wafers and build inventory well in advance of
product shipments. Because the Company's markets are volatile and subject to
rapid technology and price changes, there is a risk that the Company will
forecast incorrectly and produce excess or insufficient inventories of
particular products. This inventory risk is heightened because many of the
Company's customers place orders with short lead times. Demand will differ from
forecasts and such difference may have a material effect on actual results of
operations.
Given the volatility of the market for the Company's products, the Company
makes inventory provisions for potentially excess and obsolete inventory based
on backlog and forecast demand. However, such backlog demand is subject to
revisions, cancellations, and rescheduling. Actual demand will inevitability
differ from such backlog and forecast demand, and such differences may be
material to the financial statements. Excess inventory increases the risk of
obsolescence, is a non-productive use of capital resources, increases inventory
handling costs, and delays realization of the price and performance benefits
associated with more advanced manufacturing processes.
Other Income
Other income of $1.4 million in fiscal 1996 was earned as a result of
engineering and marketing services provided by the Company pursuant to an
agreement with AWA Limited. The Company has completed the services under the
agreement of AWA Limited and does not expect this other income to continue in
the future.
Concentration of Risk
The Company uses financial instruments that potentially subject it to
concentrations of credit risk. Such instruments include cash equivalents,
short-term investments, accounts receivable, and financial instruments used in
hedging activities. The Company invests its cash in cash deposits, money market
funds, commercial paper or readily marketable debt securities. The Company
places its investments with high-quality financial institutions and limits the
<PAGE>
credit exposure to any one financial institution or instrument. To date, the
Company has not experienced losses on these investments. The Company primarily
sells its products to original equipment manufacturers and distributors. The
Company performs ongoing credit evaluations of its customers' financial
positions and generally requires no collateral. The Company maintains reserves
for potential credit losses, and such losses have been within management's
expectations. The Company has an exposure to nonperformance by a counterparty on
the foreign exchange contracts used in hedging activities. This counterparty is
a large international financial institution and to date, it has not failed to
meet its financial obligations to the Company. The Company does not believe
there is a significant risk of non-performance by this counterparty because the
Company periodically monitors its position and the credit ratings of the
counterparty. The Company continuously evaluates the need for hedging
fluctuations in foreign currencies.
The Company operates a wafer fabrication facility which involves
significant risks inherent in any manufacturing endeavor, including production
yields, technical difficulties with process control, and events limiting
production, such as fires or other damage.
Sales and marketing risks include such factors as the loss of a
significant distributor, concentration of customers, and volume discounts that
may be granted to significant customers.
Foreign Exchange Contracts
The Company makes yen-denominated purchases of wafers from Japanese
suppliers. In fiscal year 1995 this resulted in material unfavorable foreign
exchange transactions included in cost of product revenues. The Company enters
into forward exchange contracts primarily to hedge against the short-term impact
of foreign currency fluctuations on purchases denominated in yen. The maturities
of forward exchange contracts are short-term in nature. Notwithstanding, these
precautions, however, the Company remains subject to the transaction exposures
that arise from foreign exchange movements between the dates of when foreign
currency purchase transactions are recorded and the dates cash payments are made
in foreign currencies. At September 30, 1996, commitments under such contracts
to purchase yen maturing through November 1996 were outstanding in the aggregate
amount of approximately $630,000. In the aggregate, the fair value of such
foreign currency exchange forward contracts approximated costs. These contracts
are accounted for as hedges of firm wafer purchase commitments. The Company does
not hedge for speculative purposes.
Advertising and Promotion Costs
The Company's policy is to expense advertising and promotion costs as they
are incurred. The Company's advertising and promotion expenses were
approximately $511,000, $481,000, and $464,000 in fiscal 1996, 1995, and 1994,
respectively.
Net Income (loss) Per Share
Net income (loss) per share is computed using the weighted average number
of shares of common stock and common equivalent shares, when dilutive, from
convertible preferred stock (using the if-converted method) and from stock
options and warrants (using the treasury stock method). Shares used in computing
net loss per share for 1996 excludes common equivalent shares because the effect
of their inclusion would be anti-dilutive. Fully diluted shares have not been
presented as part of the consolidated financial statements because the
difference is insignificant. Pursuant to the Securities and Exchange Commission
Staff Accounting Bulletins, common and common equivalent shares issued by the
Company at prices below the initial public offering price during the twelve
month period prior to the November, 1994 initial public offering have been
included in the calculation as if they were outstanding for all periods
presented (using the treasury stock method until shares are issued) have been
included in the calculation of common and equivalent shares outstanding for all
periods prior to the initial public offering.
<PAGE>
2. Balance Sheet Components
September 30,
1996 1995
- --------------------------------------------------------------------------------
(In thousands)
Inventories:
- --------------------------------------------------------------------------------
Raw materials $7,142 $4,259
- --------------------------------------------------------------------------------
Work-in-process 2,578 4,027
- --------------------------------------------------------------------------------
Finished goods 4,265 4,324
- --------------------------------------------------------------------------------
$13,984 $12,610
================================================================================
Property and Equipment:
- --------------------------------------------------------------------------------
Equipment and software $27,046 $11,139
- --------------------------------------------------------------------------------
Furniture and fixtures 729 363
- --------------------------------------------------------------------------------
Leasehold improvement 1,717 195
29,492 11,697
Less accumulated depreciation and amortization 11,413 7,811
- --------------------------------------------------------------------------------
$18,079 $3,886
================================================================================
3. Purchase of Business
On February 16, 1996 the Company acquired certain assets of AWA
MicroElectronics Pty. Ltd. ("AWAM"), a subsidiary of AWA Limited, based in
Sydney, Australia. The AWAM assets that were acquired by a new subsidiary of the
Company, Quality Semiconductor Australia, Pty. Ltd. ("QSA"), included a fully
operational wafer foundry business and product design center. The acquisition
was accounted for using the purchase method.
The net purchase price of the AWAM facility was $11.8 million, consisting
of $5.0 million cash, $6.3 million present value of redeemable preference shares
of QSA, fair value of warrants of $65,000, and acquisition costs of
approximately $400,000. The allocation of the purchase price, based upon
independent valuation consisted of $8.8 million of net tangible assets and $3.0
million of assembled workforce, customer base, and goodwill which are being
amortized over five years. As of September 30, 1996, the Company had incurred
approximately $375,000 of amortization expense. AWA Limited was issued 1,000
redeemable preference shares at an issue price of $1,125 per share. The shares
may be put by AWA Limited back to QSA beginning July, 1997 pursuant to the terms
of a put option deed dated January 12, 1996. These redeemable preference shares
have been categorized as debt on the balance sheet discounted to the present
value. Between July 1997 and July 1999, the Company will make the final payment
of a minimum of approximately $7.0 million up to a maximum of approximately $7.8
million. QSA's results of operations have been included in the consolidated
results of operations since the date of acquisition.
The following summarized, unaudited pro forma information, assumed the
acquisition occurred as of the beginning of fiscal 1995 (in thousands except per
share amounts). The pro forma information has been prepared for comparative
purposes only and does not purport to be indicative of what operating results
would have been if the acquisition had actually taken place at the beginning of
1995 or of future operating results.
Year Ended September 30,
- --------------------------------------------------------------------------------
1996 1995
- --------------------------------------------------------------------------------
Net revenues $47, 631 $54,321
- --------------------------------------------------------------------------------
Net income (loss) (2,378) 1,418
- --------------------------------------------------------------------------------
Net income (loss) per share $(0.43) $0.25
================================================================================
<PAGE>
4. Long-Term Obligations to Related Party
On March 28, 1996, the Company entered into an agreement with Kanematsu USA
Inc., an affiliate of Kanematsu Semiconductor Corporation, a shareholder of the
Company, to finance approximately $8.0 million of wafer fabrication equipment
for installation at QSA. The agreement expires March 31, 2001 and the borrowings
bear interest at a rate of 8.5%. As of September 30, 1996, there were borrowings
of $3.7 million against this agreement, of which $3.5 million was outstanding.
Future minimum payments on long-term obligations to Kanematsu USA Inc. are
as follows:
September 30, 1996
- --------------------------------------------------------------------------------
(In thousands)
1997 $667
1998 726
1999 791
2000 862
2001 461
5. Commitments and Contingencies
Commitments
The Company leases its manufacturing and office facilities and certain
equipment under noncancelable operating leases expiring through 2010. The
Company is generally responsible for taxes, insurance and utilities under these
leases. The Company's office facilities lease contains scheduled rent increases
over the term of the lease. Rental expense is charged to operations on a
straight-line basis over the lease term. The office facilities lease is secured
by a deposit of $47,500 included in deposits and other assets.
Future minimum lease payments under noncancelable operating leases are as
follows:
September 30, 1996
- --------------------------------------------------------------------------------
(In thousands)
1997 $1,174
1998 730
1999 428
2000 438
2001 438
Thereafter 3,946
Total rent expense for fiscal 1996, 1995, and 1994 was approximately
$952,000, $756,000, and $580,000, respectively.
<PAGE>
In March 1996 the Company entered into a $5.0 million new unsecured line of
credit which expires February 28, 1997. The borrowings under this line are
limited to eligible accounts receivable, as defined in this agreement.
Borrowings bear interest, at the Company's option, at the bank's prime rate
(8.25% at September 30, 1996) plus 0.75% or the three month Liborate (5.58% at
September 30, 1996) plus 1.75%. The loan agreement requires the Company to
maintain certain financial ratios, minimum working capital and minimum tangible
net worth and requires the bank's consent for the payment of cash dividends. The
amount of common stock repurchases is limited to $1.3 million under this
agreement. As of September 30, 1996, the Company did not meet all of the
covenants under the loan agreement, but has received a waiver from the bank.
There were no borrowings outstanding under this line as of September 30, 1996.
Contingencies
The Company has from time to time received communications from third
parties asserting that the Company is infringing certain patents and other
intellectual property rights of others or seeking indemnifications against such
alleged infringements. The Company is unable to determine at this time the
extent to which these maters will be pursued by claimants or to predict with
certainty the eventual outcome. However, the Company believes that the ultimate
resolution of these matters will not have a material adverse effect on its
financial position, results of operations or cash flow.
6. Shareholders' Equity
Warrants
As partial consideration for the purchase of QSA the Company issued 50,000
warrants with an exercise price of $13.00 per share, valued at $65,000, which
expire in February 1999. At September 30, 1996 warrants were outstanding to
purchase approximately 13,000 shares of common stock at $9.00 per share. The
warrants are currently exercisable, subject to certain antidilution provisions
and expire in October, 1996.
Preferred Stock
The Board of Directors has the authority, without any further vote or
action by the shareholders, to provide for the issuance of 1,000,000 shares of
preferred stock from time to time in one or more series with such designations,
rights, preferences and limitations as the Board of Directors may determine,
including the consideration received therefore, the number of shares comprising
each series, dividend rates, redemption provisions, liquidation preferences,
redemption fund provisions conversion rights and voting rights, all without the
approval of the holders of common stock.
Stock Option Plan
The Company's 1989 and 1995 Stock Option Plans (the plans) provide for the
grant of incentive stock options and nonstatutory stock options to employees,
directors, and consultants of the Company at prices ranging from 85% to 120%
(depending on the type of grant) of the fair market value of the common stock on
the date of grant as determined by the Board of Directors. The options generally
vest at a rate of 25% one year after the date of the grant and 12.5% every six
months or monthly thereafter. The vesting and exercise provisions of the option
grants are determined by the Board of Directors.
<PAGE>
The following is a summary of option activity (in thousands, except per
share amounts):
Options Outstanding
- --------------------------------------------------------------------------------
Available Aggregate Price Per
for grant Shares Exercise Price Share
- --------------------------------------------------------------------------------
Balance at September 30, 1993 291 603 $1,025 $0.15-$2.97
- --------------------------------------------------------------------------------
Authorized 200 -- -- --
- --------------------------------------------------------------------------------
Granted (333) 333 1,047 $2.70-$8.50
Exercised -- (48) (40) $0.15-$2.70
Canceled 138 (138) (472) $0.75-$8.50
Balance at September 30, 1994 296 750 1,560 $0.15-$2.97
Authorized 200 -- -- --
Granted (471) 471 4,804 $2.70-$15.00
Exercised -- (213) (338) $0.45-$7.20
Canceled 80 (80) (246) $0.75-$7.20
Balance at September 30, 1995 105 928 5,780 $0.75-$15.00
Authorized 410 -- -- --
Granted (1,347) 1,347 7,068 $4.25-$8.00
Exercised -- (116) (243) $0.75-$8.00
Canceled 920 (920) (7,907) $0.75-$15.00
- --------------------------------------------------------------------------------
Balance at September 30, 1996 88 1,239 $4,698 $1.20-$7.92
================================================================================
Options to purchase approximately 321,000 and 233,000 shares were
exercisable at September 30, 1996 and 1995, respectively.
For certain options granted, the Company recognized as compensation the
excess of the deemed value for accounting purposes of the common stock issuable
upon exercise of such options over the aggregate exercise price of such options
based on the fair value of the stock as determined by the Company's Board of
Directors. Additionally, in May 1994, the Board of Directors approved the
repricing of options previously granted during fiscal 1994. Approximately
144,000 stock option grants were repriced at $2.70 per share and the Company
recognized approximately $376,000 of compensation for the excess of the deemed
value of the common stock issuable upon exercise of such options over the
aggregate exercise price of such options. The compensation expense is amortized
ratably over the vesting period of the options.
January 1994, the shareholders approved the adoption of the 1993 Employee
Stock Purchase Plan (the "1993 Purchase Plan") covering 200,000 shares of common
stock for issuance under the plan and adoption of the 1993 Directors' Stock
Option Plan ( the "Directors" Plan) covering 100,000 shares of common stock
issuance under the plan. Under the 1993 Purchase Plan, employees may be granted
the opportunity to purchase common stock at 85% of market value on the first or
last day of the offering period (as defined by the plan), whichever is lower.
The Directors' Plan provides for the issuance of stock options to directors of
the Company. There were 79,770 and 43,365 shares issued under the 1993 Purchase
Plan in 1996 and 1995, respectively and 76,865 remained available for issuance
as of September 30, 1996. The Company has granted 47,500 options at exercise
prices of $8.00 to $9.00 under the Directors' Plan and no options were exercised
as of September 30, 1996.
In February 1996, the Board of Directors approved a plan for the Company to
repurchase up to 200,000 shares of its outstanding common stock in the open
market from time to time limited to the total purchase price of $1.3 million per
the loan agreement. The repurchased shares are to provide additional shares to
the existing 1995 Stock Option Plan. During fiscal 1996, the Company repurchased
135,000 shares at an average price of $6.07. In October 1996, the Company
repurchased an additional 7,500 shares at an average price of $6.42.
In October 1995 and July 1996, the Company offered all optionees holding
outstanding options the opportunity to exchange such options for similar options
with exercise prices equal to the then fair market value. Under the
<PAGE>
October 1995 offer, options to purchase 180,700 shares with exercise prices
exceeding $8.00 per share were exchanged for nonstatutory options exercisable at
$8.00 per share. Officers of the Company were excluded from the October 1995
exchange. Under the July 1996 offer, options to purchase 564,375 shares with
exercise prices exceeding $4.25 per share were exchanged for similar options
exercisable at $4.25 per share. Except for officers, each option retained the
original option's four-year vesting period. The 196,500 options exchanged by
officers have vesting beginning with the new grant date. The effect of these
exchanges has been included in the table in 1996 activity for options granted
and cancelled.
Common stock was reserved for issuance as follows (in thousands of shares):
September 30,
- --------------------------------------------------------------------------------
1996 1995
- --------------------------------------------------------------------------------
1989 and 1995 Stock Option Plans 1,327 1,033
- --------------------------------------------------------------------------------
1993 Purchase Plan and Directors` Plan 177 217
- --------------------------------------------------------------------------------
Warrants 63 13
- --------------------------------------------------------------------------------
Total 1,567 1,263
================================================================================
7. Provision (Benefit) for Taxes
The provision (benefit) for income taxes consists of the following:
September 30,
- --------------------------------------------------------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------
(In thousands)
Federal: Current $ 282 $2,352 $2,058
- --------------------------------------------------------------------------------
Deferred (700) (522) (650)
- --------------------------------------------------------------------------------
(418) 1,830 1,408
State: Current (122) 464 306
Deferred (112) (154) --
(234) 310 306
Foreign: Current 267 -- 40
Deferred (320) -- --
(53) -- 40
- --------------------------------------------------------------------------------
Total $(705) $2,140 $1,754
================================================================================
A reconciliation of the income tax provision (benefit) at the federal
statutory rate (35%) to the income tax provision (benefit) at the effective tax
rate is as follows:
September 30,
- --------------------------------------------------------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------
(In thousands)
Income tax computed at the federal $(705) $2,417 $1,749
- --------------------------------------------------------------------------------
State taxes (net of federal effect) (152) 201 202
- --------------------------------------------------------------------------------
Research and development credits (53) -- --
Goodwill amortization 101 -- --
Non-deductible interest 145 -- --
Foreign withholding tax -- -- 40
Tax exempt interest (140) -- --
- --------------------------------------------------------------------------------
Variation of temporary differences -- (641) (234)
- --------------------------------------------------------------------------------
Other individually immaterial items 99 163 (3)
- --------------------------------------------------------------------------------
$(705) $2,140 $1,754
================================================================================
<PAGE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax liabilities and assets as of September 30, 1996 and
1995 are as follows:
September 30,
- --------------------------------------------------------------------------------
1996 1995
- --------------------------------------------------------------------------------
(In thousands)
Deferred tax assets:
Vacation accrual $ 82 $ 106
- --------------------------------------------------------------------------------
State taxes -- 130
- --------------------------------------------------------------------------------
Inventory reserve 962 704
Distributor reserve 798 441
Capitalized research and development costs 61 81
Other individually immaterial items 336 147
Total deferred tax assets 2,239 1,609
Valuation allowance -- --
- --------------------------------------------------------------------------------
Net deferred tax assets $2,239 $1,609
================================================================================
Deferred tax liabilities:
Fixed and intangible assets with no tax basis $(1,902) $ --
Depreciation (101) (283)
- --------------------------------------------------------------------------------
Total deferred tax liabilities $(2,003) $(283)
================================================================================
The components of the Company's income (loss) before provision (benefit)
for taxes are as follows:
Year ended September 30, 1996
- --------------------------------------------------------------------------------
Domestic $(1,453)
- --------------------------------------------------------------------------------
Foreign (562)
- --------------------------------------------------------------------------------
Total $(2,015)
================================================================================
8. Related Party Transactions
Under agreements with two preferred shareholders, the Company recognized
technology development and license revenues of approximately $292,000 in fiscal
1994. In addition, royalty payments may be received for future sales of products
by the licensees, and the licensees are required to provide certain products to
the Company at a reduced cost. The Company accounts for the difference between
its cost for products and the current market value of the products as technology
development and license revenues, which totaled approximately $427,000 in fiscal
1994. In addition, the Company purchased approximately $6,800,000, $10,372,000,
and $8,284,000 of raw products manufactured at the shareholders' factories in
fiscal 1996, 1995, and 1994, respectively.
A shareholder acts as an intermediary in the purchase of products from the
factories discussed above. The Company pays a commission for the service and in
return receives extended payment terms, foreign exchange services, and inventory
handling services. The Company paid commissions of approximately $278,000,
$469,000, and $389,000 in fiscal 1996, 1995, and 1994, respectively. The Company
has a payable to the shareholder of approximately $220,000, $2,011,000, and
$2,694,000 at September 30, 1996, 1995 and 1994, respectively, for commissions
and inventory purchases. In another arrangement, the Company paid fees to a
subsidiary of the preferred shareholder for services rendered in securing
license agreements and other consulting totaling approximately $13,000 in fiscal
1994. The Company also had
<PAGE>
product shipments of approximately $4,898,000, $3,377,000, and $2,171,000 to
another subsidiary of the shareholder during the years ended September 30, 1996,
1995, and 1994, respectively.
The Company purchased photo masks amounting to approximately $257,000 and
$301,000 in fiscal 1995 and 1994, respectively, from a shareholder. During
fiscal 1996, 1995, and 1994, the Company purchased approximately $51,000,
$82,000, and $94,000, respectively, of computer equipment from a company owned
by affiliates of an executive officer of the Company.
9. Industry and Geographic Information
The Company operates in a single industry segment. The Company markets its
products in the United States and in foreign countries through its sales
personnel, independent sales representatives, and distributors. The Company's
geographic sales as a percent of net product revenues are as follows:
Years Ended September 30,
- --------------------------------------------------------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------
(In thousands)
United States $25,627 $32,794 $28,635
Australia 1,883 -- --
- --------------------------------------------------------------------------------
$27,510 $32,794 $28,635
Export:
Far East 15,073 9,700 4,712
- --------------------------------------------------------------------------------
Europe 2,105 3,695 2,900
- --------------------------------------------------------------------------------
$44,688 $46,189 $36,247
================================================================================
The following table summarizes the Company's operations in different
geographic areas for the year end September 30, 1996:
United
States Australia Consolidated
Sales to unaffiliated customers $40,814 $3,874 $44,688
- --------------------------------------------------------------------------------
Loss from operations (1,813) (1,717) (3,530)
- --------------------------------------------------------------------------------
Other income net 360 1,155 1,515
- --------------------------------------------------------------------------------
Loss before benefit for taxes $(1,453) $(562) $(2,015)
- --------------------------------------------------------------------------------
Identifiable assets $35,279 $17,242 $57,521
- --------------------------------------------------------------------------------
One customer accounted for 19%, 16% and 21% of total revenues in fiscal
1996, 1995 and 1994, respectively. In fiscal year 1996 two additional customers
accounted for 11% and 10% of total product revenues.
10. Subsequent Events
In November 1996, the Company negotiated a private placement of unsecured,
convertible promissory notes in the principal amount of $5.0 million, of QSA.
The notes are convertible at the option of the investors or the Company into
either 732,931 shares of the Company's common stock or 732,931 shares of
non-voting Series B Preference shares of QSA. The Company has received $3
million of the total financing by December 1996, and plans to complete the
balance of the funding no later than February 28, 1997.
<PAGE>
In December 1996 the Company negotiated revised payment terms on the
balance due to AWA Limited as a result of the acquisition of the wafer
fabrication facility from AWA MicroElectronics Pty. Ltd. The revised payment at
the option of the Company is either $3.0 million by January 31, 1997 and the
balance of $4.0 million by January 31, 1998 or $3.0 million by July 31, 1997 and
the balance of $4.0 million by January 31, 1998. If the latter payment option is
elected then the $4.0 million balance will bear interest at 10% from July 1,
1997.
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Quality Semiconductor, Inc.
We have audited the accompanying consolidated balance sheets of Quality
Semiconductor, Inc. as of September 30, 1996 and 1995, and the related
consolidated statements of operations, shareholders equity, and cash flows for
each of the three years in the period ended September 30, 1996. Our audits also
included the financial statement schedule listed in the Index at Item 14(a).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Quality Semiconductor, Inc. at September 30, 1996 and 1995, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended September 30, 1996, in conformity with generally accepted
accounting principles. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
ERNST & YOUNG LLP
San Jose, California October 18, 1996, except as to Note 10, as to which the
data is December 12, 1996
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
Not Applicable
PART III
Item 10. Directors, Officers and Other Registrants' of the Registrant
The information concerning the registrant's executive officers is
included under the caption "Officers and Directors of the Registrant" following
Part I, Item 1 of this report.
Item 11. Executive Compensation
The information required for this item is incorporated by reference to
the Executive Compensation Section of the Company's Proxy Statement which will
be filed with the Securities and Exchange Commission within 120 days after
September 30, 1996.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required for this item is incorporated by reference to the
Security Ownership of Principal Shareholders and Management Section of the
Company's Proxy Statement which will be filed with the Securities and Exchange
Commission within 120 days after September 30, 1996.
Item 13. Certain Relationships and Related Transactions
The information required for this item is incorporated by reference to
Certain Relationships and Related Transactions Section of the Company's Proxy
Statement which will be filed with the Securities and Exchange Commission within
120 days after September 30, 1996.
<PAGE>
PART IV
Item 14. Exhibits, Financial Statements Schedules, and Reports of Form 8K
(a) The following documents are filed as part of this Report:
1. Consolidated Financial Statements
2. Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts
SequentiaL
Exhibit Exhibit Document Description Page
Number Number
3.1 Restated Articles of Incorporation of the Company. *
3.2 Form of Amended and Restated Articles of Incorporation *
of the Company.
3.3 Bylaws of the Company. *
3.4 Certificate of Amendment of the Bylaws of the Company *
4.1 Subscription Agreement dated January 12, 1996 between **
AWA Limited and Quality Semiconductor Australia Pty. Ltd.
4.2 Semiconductor, Inc. and AWA Limited. **
4.3 Common Stock Purchase Warrant dated February 16, 1996 **
issued by Quality Semiconductor, Inc. to AWA Limited.
10.1 Form of Indemnification Agreement for directors and officers. *
10.2 Amended and Restated 1989 Stock Option Plan and forms *+
of agreements thereunder.
10.3 1993 Employee Stock Purchase Plan and form of *+
subscription agreement.
10.4 1993 Director' Stock Option Plan and form of subscription *+
agreement.
10.5 Technology/Product Development & License Agreement *
between the Company and Seiko Instruments, Inc.,
dated as of October 17, 1988, as amended to date.
<PAGE>
Sequential
Exhibit Exhibit Document Description Page
Number Number
10.6 Technology/Product Development & License Agreement *
between the Company and Yamaha Corporation, dated
as of September 23, 1989, as amended to date.
10.7 Distribution Agreement between the Company and Kanematsu *
Semiconductor Corporation, dated as of November 7, 1991.
10.8 Sales Agreement between the Company and Kanemat *
Semiconductor Corporation, dated as of June 1, 1990,
as amended to date.
10.9 Lease Agreement dated December 12, 1990 between *
the Company and the Prudential Insurance Company
of America.
10.10 Master Lease Agreement dated November 1, 1993 *
between the Company and Comdisco Inc., as amended.
10.11 Credit Agreement, dated November 30,1994 between ***
the Company and Bank of America.
10.12 Asset Purchase Agreement dated January 12, 1996 **
between Quality Semiconductor Australia Pty. Ltd. and AWA
MicroElectronics Pty. Ltd.
10.13 Guaranty and Indemnification Agreement dated January 12, **
1996 among AWA Limited, Quality Semiconductor Australia Pty
Ltd. and Quality Semiconductor, Inc.
10.14 Technology Services Agreement dated February 16, 1996 **
among AWA Limited, AWA MicroElectronics Pty. Ltd. and
Quality Semiconductor, Australia Pty. Ltd.
10.15 Form of QSA Convertible/Redeemable Note Insurance Agreement, ****
dated November 21, 1996, between Quality Semiconductor Australia,
Pty. Limited, Quality Semiconductor, Inc. and Technology Associates
(Note No.1).
10.16 Form of QSA Convertible/Redeemable Note Issuance Agreement, ****
dated Nobember 21, 1996, between Quality Semiconductor Australia,
Pty. Limited, Quality Semiconductor, Inc. and Win Win Venture
Capital Corporation (Note No.3).
<PAGE>
Sequential
Exhibit Exhibit Document Description Page
Number Number
10.17 Form of QSA Convertible/Redeemable Note Issuance Agreement, ****
dated Nobember 21, 1996, between Quality Semiconductor Australia,
Pty. Limited, Quality Semiconductor, Inc. and Win Win Venture
Capital Corporation (Note No.4).
10.18 Form of QSA Convertible/Redeemable Note Issuance Agreement, ****
dated Nobember 21, 1996, between Quality Semiconductor Australia,
Pty. Limited, Quality Semiconductor, Inc. and Win Win Venture
Capital Corporation (Note No.5).
10.19 Form of Unsecured Convertible Promissory Note of Quality ****
Semiconductor Australia, Pty. Limited.
11.1 Statement regarding Computation of Earnings Per Share 51
22.1 Subsidiaries of the Registrant 52
23.1 Consent of Ernst & Young LLP, Independent Auditors. 53
25.1 Power of Attorney included on the signature page of this 49
Annual Report on Form 10-K.
* Incorporated by reference to exhibits filed in response to Item 16(a),
"Exhibits," of the Registrant's Registration Statement on Form S-1 and Amendment
No. 1, Amendment No. 2, Amendment No. 3, Amendment No. 4, and Amendment No. 5
thereto (File No. 33-72884), which became effective on November 16, 1994.
** Previously filed with Form 8K on March 4, 1996.
*** Previously Filed with Form 10-K on December 26, 1995.
**** Previously filed with Form 8-K on December 10, 1996.
+ Indicates a management contract or compensatory plan or arrangement
required to be filed as an Exhibit to this Annual Report on Form 10-K pursuant
to Item 14(c).
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
QUALITY SEMICONDUCTOR, INC.
Dated: December 20, 1996 By: /s/R. Paul Gupta
----------------
R. Paul Gupta
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints R. Paul Gupta and Stephen H. Vonderach,
his attorney-in-fact, with the power of substitution, for him in any and all
capacities, to sign any amendments to this Report on Form 10-K, and to file the
same, with exhibits thereto and other documents in connection therewith with the
Securities and Exchange Commission, hereby ratifying and confirming all that
said attorney-in-fact, or his substitute or substitutes may do or cause to be
done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons in the capacities and
on the dates indicated.
Signature Title Date
/s/Chun P. Chiu Director and Chairman of the Board December 20, 1996
- -----------------------
Chun P. Chiu
/s/R. Paul Gupta Director, President and December 20, 1996
- ----------------------- Chief Executive Officer
R. Paul Gupta
/s/Stephen H. Vonderach Vice President of Finance and December 20, 1996
- ----------------------- Chief Financial Officer
Stephen H. Vonderach
/s/Andrew J. S. Kang Director December 20, 1996
- -----------------------
Andrew J. S. Kang
/s/Manhor L. Malwah Director December 20, 1996
- -----------------------
Manhor L. Malwah
/s/Robert L. Puette Director December 20, 1996
- -----------------------
Robert L. Puette
/s/Masaharu Shinya Director December 20, 1996
- -----------------------
Masaharu Shinya
/s/David D. Tsang Director December 20, 1996
- -----------------------
David D. Tsang
<PAGE>
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
Charged to
Costs and (1)
Beginning Expense Deductions Ending
Balance Balance
Year ended September 30, 1996
Allowance for Doubtful Accounts . $123,000 $ - $ - $123,000
Allowance for Sales Returns . . . . - 50,000 - 50,000
-----------------------------------------
=========================================
$123,000 $ 50,000 $ - $173,000
=========================================
Year ended September 30, 1995
Allowance for Doubtful Accounts . $144,000 $40,000 $ 61,000 $123,000
Allowance for Sales Returns . . . . 20,000 - 20,000
=========================================
$164,000 $40,000 $ 81,000 $123,000
=========================================
Year ended September 30, 1994
Allowance for Doubtful Accounts . $132,000 $70,000 $ 58,000 $144,000
Allowance for Sales Returns . . . . 420,000 20,000 420,000 20,000
=========================================
$552,000 $90,000 $478,000 $164,000
=========================================
(1) Primarily deductions represent write-offs of accounts receivable and
sales returns.
<PAGE>
Exhibit 11.1
QUALITY SEMICONDUCTOR, INC.
STATEMENT OF COMPUTATION OF EARNINGS (LOSS) PER SHARE
(In thousands, except per share data)
September 30,
1996 1995 1994
------------ ------------ ---------
Net income (loss) $(1,310) $4,766 $3,243
============ ============ =========
Computation of common and common
equivalents
shares outstanding
Common stock 5,524 4,750 1,294
Options and warrants - 559 430
Cheap stock - 29 204
Preferred shares - 311 2,176
============ ============ =========
Shares used in computing per share 5,524 5,649 4,104
amount
============ ============ =========
Net income (loss) per share $(0.24) $0.84 $0.79
============ ============ =========
- ----------
Fully diluted computation not presented since such amount differs by less than
3% of the net income per share amount shown above.
<PAGE>
Exhibit 22.1
QUALITY SEMICONDUCTOR, INC.
LIST OF SUBSIDIARIES
Name Location of Names Under Which Subsidiary
Incorporation is Doing Business
Quality Semiconductor Australia Quality Semiconductor
Australia Pty. Limited ACN 072 373 730 Australia
<PAGE>
Exhibit 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-8 Nos. 33-89724 and 333-3234) pertaining to the 1989 Stock Option Plan,
1993 Employee Stock Purchase Plan, 1993 Director's Plan, 1995 Stock Option Plan
of Quality Semiconductor, Inc. of our report dated October 18, 1996 (except as
to Note 10, as to which the date is December 12, 1996), with respect to the
consolidated financial statements and schedule of Quality Semiconductor, Inc.
included in the Annual Report (Form 10-K) for the year ended September 30, 1996.
ERNST & YOUNG LLP
San Jose, California
December 18, 1996
<PAGE>
