UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10Q
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X QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
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OF THE SECURITIES EXCHANGE ACT OF 1934
The quarterly period ended June 30, 1996
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
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OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from ________ to ___________
Commission File Number 2-23128
Quality Semiconductor, Inc.
(Exact name of registrant as specified in it charter)
California 77-0199189
(State of Incorporation) (IRS Employer Identification Number)
851 Martin Avenue
Santa Clara, California 95050
(Address of principal executive office)
Registrant's telephone number, including area code: (408) 450-8000
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
The number of outstanding shares of the Registrant's Common Stock as of June 30,
1996 was 5,489,092.
<PAGE>
Quality Semiconductor, Inc.
Form 10-Q for the Quarter Ended June 30, 1996
INDEX
PART I. FINANCIAL INFORMATION Page
Item 1 - Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 1996
and September 30, 1995 3
Condensed Consolidated Statements of Operations
for the three and nine months ended June 30, 1996 and June
30, 1995 4
Condensed Consolidated Statements of Cash Flows
for the nine months ended June 30, 1996 and June 30, 1995 5
Notes to Condensed Consolidated Financial Statements 6
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
PART II. OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K/A 15
Signatures 16
Exhibit 11.1 17
<PAGE>
PART I. FINANCIAL INFORMATION
Quality Semiconductor, Inc.
Condensed Consolidated Balance Sheets
(In thousands)
June 30, September 30,
1996 1995 (1)
----------------- ----------------
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $4,874 $7,637
Short-term investments 3,771 9,480
Accounts and other receivables, net 7,715 5,851
Inventories 15,449 12,610
Other current assets 2,561 3,071
----------------- ----------------
Total current assets 34,370 38,649
Property and equipment, net 16,806 3,886
Deposits and other assets 3,157 244
================= ================
Total assets $54,333 $42,779
================ ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $5,257 $2,892
Accounts payable to related parties 299 2,011
Accrued liabilities 4,695 3,964
Deferred income on shipments to
distributors 1,762 1,898
Capital lease obligations due
within one year 74 194
Notes payable to related party due
within one year 350 311
--------------- ----------------
Total current liabilities 12,437 11,270
Capital lease obligations - 5
Redeemable preference shares to AWA, Ltd. 6,808 -
Notes payable to related party 1,657 -
Deferred tax liabilities 2,485 283
Shareholders' equity
Preferred stock, $.001 par value: Authorized 1,000;
Issued and outstanding - none - -
Common stock, $.001 par value, Authorized - 25,500, Issued and
outstanding 5,489 and 5,475 5 5
Additional paid -in-capital 28,231 28,386
Retained earnings 3,187 3,478
Deferred compensation (477) (648)
----------------- ----------------
Total shareholders' equity 30,946 31,221
================= ================
Total liabilities and
shareholders' equity $54,333 $42,779
================ ================
See accompanying notes to condensed consolidated financial statements.
(1) The information in this column was derived from the Company's audited
financial statements.
<PAGE>
Quality Semiconductor, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
(In thousands, except per share data)
Three months ended Nine months ended
June 30, June 30,
-----------------------------------
1996 1995 1996 1995
---------------- ---------------
Net revenues $11,140 $12,492 $33,472 $35,031
Cost of revenues:
Cost of revenues (other than items below) 7,208 6,395 19,655 17,855
Inventory write-downs 2,840 - 2,840 -
-----------------------------------
Total cost of revenues 10,048 6,395 22,495 17,855
-----------------------------------
Gross margin 1,092 6,097 10,977 17,176
Operating expenses:
Research and development 1,916 1,630 4,92 4,659
Sales and marketing 1,701 1,733 5,308 5,017
General and administrative 1,113 856 3,061 2,401
----------------------------------
Total operating expenses 4,730 4,219 13,294 12,077
----------------------------------
Operating income (loss) (3,638) 1,878 (2,317) 5,099
Other income 959 - 1,438 -
Interest, net (74) 168 165 361
----------------------------------
Income (loss) before provision for income taxes(2,753) 2,046 (714) 5,460
Benefit (provision) for income taxes 970 (634) 255 (1,692)
==================================
Net income (loss) $(1,783) $1,412 ($459) $3,768
==================================
Net income (loss) per share ($0.32) $0.2 ($0.08) $0.68
==================================
Common and common equivalent shares used
in computing per share amounts 5,494 5,868 5,518 5,520
==================================
See accompanying notes to condensed consolidated financial statements.
<PAGE>
Quality Semiconductor, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
Nine months ended
June 30,
---------------------------
1996 1995
---------- ------------
Operating activities
Net income (loss) ($459) $3,768
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 2,516 1,709
Deferred income taxes 2,202 -
Deferred compensation amortization 171 171
Changes in operating assets and (2,777) (3,848)
liabilities
---------- ---------
Net cash provided by operating activities 1,653 1,800
Investing activities
Acquisition expenditures (4,397) -
Capital expenditures (2,224) (1,633)
Sales (purchases) of short-term investments, net 5,709 (11,709)
Deposits and other assets (2,913) 33
Repurchase of common stock (584) -
---------- ------------
Net cash used in investing activities (4,409) (13,309)
---------- ------------
Financing activities
Principal payments on capital lease obligations (125) (233)
Principal payments on long-term debt (311) (749)
Proceeds from issuance of stock 429 13,504
Proceeds from reduction in notes receivable from
shareholders - 11
---------- ------------
Net cash provided by (used in) financing (7) 12,533
activities
---------- ------------
Net increase (decrease) in cash and cash (2,763) 1,024
equivalents
Cash and cash equivalents at beginning of period 7,637 4,509
========== ============
Cash and cash equivalents at end of period $4,874 $5,533
========== ============
Supplemental disclosures of significant non-cash investing and financing
activities:
Acquisition of property, plant and
equipment for issuance of long-term debt $8,814 -
See accompanying notes to condensed consolidated financial statements.
<PAGE>
QUALITY SEMICONDUCTOR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Basis of Presentation
The accompanying financial statements have been prepared by the Company without
audit and reflect all adjustments (consisting of normal recurring accruals)
which are, in the opinion of management, necessary to present fairly the
financial information included therein. The consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiary, Quality
Semiconductor Australia, PTY., LTD. (QSA). Intercompany accounts and
transactions have been eliminated in consolidation. This financial data should
be read in conjunction with the Company's September 30, 1995 annual financial
statements.
The functional currency of the Company's foreign subsidiary is the Australian
Dollar. Subsidiary financial statements are remeasured into U.S. Dollars for
consolidation. Foreign currency transaction gains and losses were immaterial for
all periods presented.
For convenience, the accompanying financial statements have been shown as ending
on the last day of the calendar month.
The results of operations for the three and nine months ended June 30, 1996 may
not necessarily be indicative of the results for the fiscal year ending
September 30, 1996.
Note 2. Acquisition
On February 16, 1996 the Company acquired certain assets of AWA Microelectonics
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
evelop new products and technologies. 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,
fair value of warrants of $0.1 million, and acquisition costs of approximately
$0.4 million. As of June 30, 1996, approximately $4.4 million cash has been
disbursed, the majority of the remaining balance of payments are reflected in
long-term debt. 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. 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
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 proforma information, assume the acquisition
occurred as of the beginning of the respective periods (in thousands except per
share amounts). The proforma results include estimates of AWAM results for the
three and nine months ended June 30, 1996 and 1995.
Three Months Ended Nine Months Ended
June 30, June 30,
1996 1995 1996 1995
Net sales $11,140 $14,525 $36,415 $41,130
Net income (loss) $(1,783) $ 575 $(1,527) $ 1,227
Net income (loss) per share$(.32) $ .10 $ (.27) $ .22
<PAGE>
QUALITY SEMICONDUCTOR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 3. 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. 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, if material, would be reported in a separate component of shareholders'
equity. 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. Gross unrealized gains and losses as of June
30, 1996 are immaterial.
All short-term investments, by contractual maturity, mature in less than one
year. The amortized cost and fair value of short-term investments held at June
30, 1996 are summarized as follows, in thousands:
Estimated
Fair
Value
-------------
Money Market $132
Commercial paper 0
State and municipal obligations 6,214
=============
$6,346
=============
Amounts included in cash and cash equivalents $2,494
Amounts included in short-term investments 3,771
Amounts included in Interest Receivable 81
(Interest)
=============
$6,346
=============
Note 4. Inventories
Inventories consisted of (in thousands):
June 30, September 30,
1996 1995
---------------- --------------
Raw Materials $6,948 $4,259
Work-in-process 2,904 4,027
Finished goods 5,597 4,324
================ ==============
$15,449 $12,610
================ ==============
During the fiscal quarter ending June 30, 1996, the Company recorded $2,840,000
in inventory write-downs for excess inventory resulting from changes in the
product revenue mix and reduced OEM demand.
<PAGE>
QUALITY SEMICONDUCTOR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 5. Line of Credit
In November 1994, the Company entered into a $3,000,000 secured line of credit
which expired February 29, 1996. In March 1996 the Company entered into a
$5,000,000 new unsecured line of credit which expires February 28, 1997. The
borrowings under this line are limited to eligible accounts receivable, as
defined in the agreement. Borrowings bear interest, at the Company's option, at
the bank's prime rate (8.25% at June 30, 1996) plus .75% or the Three Month
Libor rate (5.58% at June 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 $1,000,000
under the agreement. As of June 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 the line as of June 30, 1996.
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 June 30, 1996, there were borrowings of
$2,007,109 against this agreement.
Note 6. Shareholders' Equity
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. The repurchased shares are to provide shares to be
issued pursuant a new Stock Option Plan.
On April 4, 1996 the Company repurchased 50,000 shares of its common stock in
the open market at a price of $5.25. On April 9, 1996, the Company repurchased
50,000 of its common stock in the open market at a price of $6.44.
Note 7. Subsequent Events
On July 10, 1996, the Company repurchased 25,000 of its common stock in the open
market at a price of $6.70.
<PAGE>
QUALITY SEMICONDUCTOR, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
On February 16, 1996 the Company acquired certain assets of AWA
Microelectonics 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. Beginning February
16, 1996, the company began manufacturing wafers in this facility for sale to
customers. The Company's results of operations for the third quarter and first
nine months of fiscal year 1996 included operations of QSA from February 16,
1996 to June 30, 1996.
Total revenues for the quarter ended June 30, 1996 decreased 10.8% from
the corresponding period in the prior fiscal year. This decrease was due mainly
to the decrease in demand from OEM customers. Total revenues for the nine months
ended June 30, 1996 decreased 4.5% from the same period of 1995. The decrease
for the nine-month period was also mainly the result of the decrease in OEM
demand which occurred in the second and third quarters of fiscal year 1996.
There can be no assurance that the market for semi-conductor products will
either remain at its current level or grow in future periods. Further, there can
be no assurance that the Company will be able to increase or maintain its market
share in the future or to sustain historical growth rates.
The gross margin was 9.8% of revenues in the third quarter of fiscal
1996 as compared to 48.8% in the third quarter of fiscal 1995. The decrease in
gross margin from the prior fiscal year's third quarter was primarily due to the
recording of $2,840,000 in inventory write-downs for excess inventory resulting
from changes in the product revenue mix and reduced OEM demand. Prior to the
recording of inventory write-downs, third quarter fiscal 1996 margins were 35.3%
or 13.5 percentage points lower than the same period a year ago. The lower
margins were principally due to changes in product mix, lower OEM demand,
absorption of fixed costs at QSA and lower average selling prices, which were
offset in part by the Company's cost-cutting measures. The gross margin for the
nine months ended June 30, 1996 was 32.8% compared to 49.0% for the nine months
ended June 30, 1995. This decrease also was mainly the result of excess
inventory write-downs. Prior to inventory write-downs, the gross margin for the
first nine months of fiscal 1996 was 41.3%, 7.7 percentage points lower than the
first nine months of fiscal 1995. The margin reductions were due to changes in
product mix, reduced OEM demand, absorption of QSA fixed costs and lower average
selling prices which were partially offset by cost reductions. The Company's
gross margin can be affected by a number of factors including changes in product
or distribution channel mix, cost and availability of parts, and competitive
pressures on pricing. The Company continues to experience increasing pricing
pressure from its competitors. The Company's margins can vary depending upon the
mix of distributor and direct sales in any particular fiscal period and the
Company anticipates that this mix will continue to fluctuate in future periods.
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.
Research and development (R&D) expenses increased 17.6% in the third
quarter of fiscal 1996 as compared to the third quarter of fiscal 1995. This
increase was mainly the result of costs associated with qualifying the QSA wafer
fab to produce QSI wafers. These expenses were partially offset by lower payroll
costs and reduced consulting expense. As a percentage of total revenues, R&D
expenses increased to 17.2% of revenues in the third quarter of fiscal 1996, as
compared to 13.1% in the third quarter of fiscal 1995 as a result of lower
revenues in the third quarter of fiscal 1996 and the increased expenditures
mentioned above. R&D expenses for the nine months of fiscal 1996 increased to
14.7% of revenues compared to 13.3% of revenues for the nine months of fiscal
1995 due to lower revenues and increased spending to qualify QSA to produce QSI
wafers. The Company expects that its research and development expenses will
increase, although such expenses may vary as a percentage of revenues in future
periods.
Sales and marketing expenses decreased 1.8% and represented 15.3% of
total revenues in the third quarter of 1996, as compared to 13.9% of total
revenues in the third quarter of fiscal 1995. The decrease in selling expenses
was primarily attributed to decreased promotional expenses and reduced sales
commissions as a result of lower revenue. Sales and marketing expenses increased
5.8% during the nine months ended June 30, 1996 over the same period last year
due primarily to increased promotional expense incurred in the second quarter of
fiscal 1996, payroll related expenses and travel, partially offset by lower
sales commissions. The Company believes that increased expenses for sales and
marketing activities, particularly in export markets, are essential to
maintaining its competitive position. The Company expects that selling and
marketing expenses will continue to increase but may vary as a percentage of
total revenue in future periods.
General and administrative expenses increased 30.0% and represented
10.0% of total revenues in the third quarter of fiscal 1996, as compared to 6.9%
of total revenues in the third quarter of fiscal 1995. General and
administrative expenses increased 27.5% during the nine months ended June 30,
1996 over the nine months ended June 30, 1995. The increases in both the third
quarter and nine-month period of fiscal 1996 were due mainly to added G&A costs
of the Australian subsidiary and legal costs related to patent prosecution and
defense.
Other income of $959,000 for the third quarter and $1,438,000 for the
nine-month periods ended June 30, 1996, was earned primarily as the result of
engineering and marketing services provided by the Company pursuant to an
agreement with AWA Limited.
Interest expense was $74,000 during the three months ended June 30,
1996 compared to interest income of $168,000 during the third quarter of 1995.
The $242,000 change was due to using $5.7 million of invested funds for the
purchase of AWAM assets in February, 1996 and interest expense associated with
the Kanematsu note and Redeemable Preference Shares. Interest income for the
nine months of fiscal 1996 was 54.3% lower than interest income for the nine
months ending June 30, 1995 also due to using $5.7 million of invested funds for
the purchase of AWAM assets in February, 1996 and interest expense associated
with the Kanematsu note and Redeemable Preference Shares.
The Company's estimated effective tax rate was 35% for the third
quarter and nine months of fiscal 1996 compared with 31% for the third quarter
and nine months of fiscal 1995. The Company has recorded a tax benefit for the
three and nine months of fiscal 1996 based on available carry-back potential of
operating losses incurred.
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 ("ASPs") 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 of non-recurring development revenue; (iv)
manufacturing and operations, such as fluctuations in manufacturing yields,
inventory management, raw materials, and production and assembly capacity; (v)
expenses that may be incurred in obtaining, enforcing and defending claims with
respect to intellectual property rights; (vi) sales and marketing, such as loss
of a significant distributor, concentration of customers, volume discounts that
may be granted to significant customers, product returns and exchanges; (vii)
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 semiconductor industry is intensely competitive and is
characterized by price erosion, declining gross margins, rapid technological
change, product obsolescence and heightened international competition in many
markets. The Company's competitors include large semiconductor companies 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. As a
result, ASPs in the semiconductor industry generally, and for the Company's
products in particular, have decreased significantly over the life of each
product. The Company expects that ASPs for its existing products will continue
to decline over time and that ASPs for each new product will decline
significantly over the life of the product. Declines in ASPs in the Company's
products, if not offset by reductions in the cost of producing those products or
by sales of new products with higher gross margins, would decrease the Company's
overall gross margins, could cause a negative adjustment to the valuation of the
Company's inventories and could materially and adversely affect the Company's
operating results.
A substantial majority of the Company's revenues are derived from sales of
interface logic devices and, in particular, products in the Company's QSFCT and
QuickSwitch logic family. The Company anticipates that sales of these products
will continue to comprise the bulk of the Company's revenues for the foreseeable
future. The demand for such products may be sharply reduced by microprocessors
or other system devices that increasingly include interface logic. Because of
the Company's dependence on sales of these products, declines in gross margins
for these products resulting from declines in ASPs or otherwise could have a
material adverse effect on the Company's operating results.
The Company's future success is highly dependent upon the timely
completion and introduction of new products at competitive price/performance
levels. The failure of the Company to timely complete and introduce new products
at competitive price/performance levels would materially and adversely affect
the Company's operating results. 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. Currently, over 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 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 Ltd.
("TSMC"). The Company's reliance on its suppliers to fabricate its wafers at
their production facilities in Japan and Taiwan 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 Seiko and
Yamaha, and there can be no assurance that the Company will not experience
similar or more severe delays from its suppliers in the future. Any inability or
unwillingness of the Company's fabrication providers 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's reliance on third-party wafer fabrication suppliers also increases the
length of the development cycle for the Company's products, which may provide
time to market advantages to competitors that have in-house fabrication
capacity. 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. The
Company relies on overseas subcontractors for the assembly and testing of its
finished products. Any significant disruption in adequate supplies from, or
degradation in the quality of components or services supplied by, 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. The Company purchases
all of its semiconductor wafers and substantially all of its assembly services
from foreign suppliers. In addition, sales outside of North America accounted
for approximately 36% of the Company's net revenue in the third quarter of
fiscal 1996 as compared to 29% in the third quarter of fiscal 1995. Sales
outside of North America for the first nine months of fiscal 1996 were 39% of
net revenue as compared to 29% for the first nine months of fiscal 1995. As a
result, the Company's business is subject to the risks generally associated with
doing business abroad, such as foreign governmental regulations, reduced
protection for intellectual property rights, 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. The Company's
purchases of wafers from Seiko Instruments Inc. are denominated in Japanese yen.
Although the Company has engaged in hedging activities to mitigate exchange rate
risks, there can be no assurance that the Company will not be materially
adversely affected by a decline in exchange rate. The Company has benefited by
the increase in the dollar during the third quarter of fiscal 1996. 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 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 any such infringing products. In addition, the
Company could suffer significant monetary damages, which could include treble
damages for any infringement that is determined to be willful. The Company's
future success will depend to a large extent on the continued contributions of
key employees, who would be difficult to replace, and 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
have a material adverse effect on the Company's business. To manage recent and
potential future growth effectively, the Company will need to continue to
implement and improve its operational, financial and management information
systems and to hire, train, motivate and manage its employees. There can be no
assurance that the Company will be able effectively to achieve growth or manage
any such growth, and failure to do so could have a material adverse effect on
the Company's operating results. 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. 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. The Company markets and distributes its products
primarily through manufacturers' representatives and independent distributors.
Domestic distributors accounted for approximately 25% of the Company's total
revenues during the third quarter of fiscal 1996 and 23% in the third quarter of
fiscal 1995, primarily due to a shift in OEM sales. Domestic distributors
accounted for approximately 27% of the Company's total revenues during the first
nine months of fiscal 1996 and 22% of the total revenues during the first nine
months of fiscal 1995 also reflecting the shift in OEM sales. The Company's
distributors typically offer competing products. The distribution channels have
been characterized by rapid change, including consolidations and financial
difficulties. 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. The semiconductor industry has historically been
cyclical and subject to significant economic downturns at various times and has
been characterized by diminished product demand, accelerated erosion of ASPs and
over capacity. In addition, the end-markets for systems that incorporate the
Company's products are characterized by rapidly changing technology and evolving
industry standards. The Company may experience substantial period-to-period
fluctuations in future operating results due to general semiconductor industry
conditions, overall economic conditions or other factors. 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. The
Company's stock price is also subject to potentially large volatility due to the
very low trading volumes of the Company's stock on most days since the initial
public offering of the Company's stock on November 17, 1994. In addition, this
low trading volume may continue and could affect the ability of shareholders to
sell their shares. Liquidity and Capital Resources During the first nine months
ended June 30, 1996 the Company generated $1,653,000 in cash from operating
activities compared to $1,800,000 generated during the first nine months of
fiscal 1995. Cash used in investing activities during the nine months of fiscal
1996 totaled $4,409,000 compared to $13,309,000 in the first nine months of
fiscal 1995. The former reflected mainly the acquisition of the wafer fab
facility while the latter was mainly the result of investing the net proceeds
from the Company's initial public offering in November 1994. Use of $7,000 in
financing activities for the first nine months of 1996 were primarily reductions
in long-term debt partially offset by sales of the Company's stock through the
stock purchase plans. Financing activities for the first nine months of fiscal
1995 provided cash of $12,533,000 primarily as a result of the Company's initial
public offering. In March 1996 the Company entered into a new $5,000,000
unsecured line of credit replacing the $3,000,000 line which expired in February
1996. The new line expires February 28, 1997. The borrowings under this line are
limited to eligible accounts receivable, as defined in the agreement. Borrowings
bear interest, at the Company's option, at the bank's prime rate (8.25% at June
30, 1996) plus .75% or the Three Month Libor rate (5.58% at June 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. As of June 30, 1996, because
the company recorded inventory write-downs of $2,840,000, the company did not
meet the minimum tangible net worth and loss limitation covenants under the loan
agreement, but has received a waiver from the bank. The amount of common stock
repurchases is limited to $1,000,000 under the agreement. There were no
borrowings outstanding under the line as of June 30, 1996. 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%. There were $2.0 million of borrowings outstanding under the
agreement at June 30, 1996. 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 fiscal 1996.
<PAGE>
PART II OTHER INFORMATION
Items 1-5 Not Applicable
Item 6. Exhibits and Reports on Form 8-K/A
(a) Exhibits
No. 11.1 - Statement of Computation of Earnings Per Share
(b) Reports on Form 8-K/A
On April 25, 1996, the Company filed a report on form 8-K/A reporting under
Item 2 thereof regarding the agreement with AWA Ltd. concerning the completion
of the purchase by Quality Semiconductor Australia Pty. Ltd., a wholly-owned
subsidiary of the Company, of certain assets and assumption of certain
liabilities of the wafer foundry business of AWA Microelectronics Pty. Ltd.,
effective February 16, 1996.
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
(Registrant)
Date: By: / s / R. Paul Gupta
R. Paul Gupta
Chief Executive Officer
Date: By: / s / Stephen H. Vonderach
Stephen H. Vonderach
Chief Financial Officer
Chief Accounting Officer
<PAGE>
Exhibit 11.1
QUALITY SEMICONDUCTOR, INC.
STATEMENT OF COMPUTATION OF EARNINGS (LOSS) PER SHARE
(In thousands, except per share data--Unaudited)
Quarter Ended Nine Months Ended
----------------------------
June 30, June 30,
----------------------------
1996 1995 1996 1995
----------------------------
Net income (loss) $(1,783) $1.412 $(459) $3,768
=============================
Computation of common and common equivalents
shares outstanding
Common stock 5,494 5,307 5,518 4,522
Options and warrants - 561 - 545
Cheap stock - - - 39
Preferred shares - - - 414
============================
Common and common equivalent shares used in
computing per share amounts 5,494 5,868 5,518 5,520
=============================
Net income (loss) per share $(0.32) $0.24 $(0.08) $0.68
=============================
- ----------
Fully diluted computation not presented since such amount differs by less than
3% of the net income (loss) per share amount shown above.
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
(Registrant)
Date: By:
R. Paul Gupta
Chief Executive Officer
Date: By:
Stephen H. Vonderach
Chief Financial Officer
Chief Accounting Officer
