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 28, 1997
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
December 12, 1997 was $25,095,652. 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 December 12, 1997 was 7,373,081.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the Registrant's Proxy Statement related to the 1998 Annual
Meeting of Shareholders, to be filed subsequent to the date hereof - Part III.
<PAGE>
PART I
Item 1. Business
Information set forth in this report constitutes and includes forward
looking information. The accuracy of such information is subject to a variety of
risks and uncertainties, including product mix, the Company's ability to obtain
or maintain design wins, market conditions in the personal computer and
semiconductor industries, product development schedules and other matters.
Actual results may differ from the results discussed in such forward looking
statements.
Introduction
Quality Semiconductor, Inc. ("QSI" or the "Company") designs, develops
and markets high-performance logic, clock management and QuickSwitch(R) devices,
advanced memory products and advanced networking semiconductor products. The
Company targets systems manufacturers principally in the networking, computer,
workstation, and telecommunications markets. QSI's logic products include the
5-volt QSFCT and 3.3-volt LCX families of high-speed, low-noise interface
devices that interconnect various elements in a microprocessor-based system, and
the QuickSwitch(R) 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 networking products include two Fast
Ethernet CMOS transceivers that provide high integration solutions for the
adapter, repeater, switch and card bus markets and an ATM
multiplexer/demultiplexer device.
Quality Semiconductor was incorporated in 1984 under the laws of
California. The Company's principal executive offices are located at 851 Martin
Avenue, Santa Clara, California 95050-2903 and its telephone number is (408)
450-8000.
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 their 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, computer, workstation,
telecommunication, and portable system 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
<PAGE>
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 manufacturer's are demanding higher
performance logic 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 233 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.
QSI 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, workstation,
peripherals, I/O subsystems, telecommunications and portable systems industries.
High Performance Networking Products
The Company has several networking products that provide high
integration solutions for the adapter, repeater, switch and card bus markets.
The Company's product development in the networking market is directed to
multimedia applications and interoperability. The QS6810 ATM 4:1
Multiplexer/Demultiplexer serves 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. See "Factors That May Affect Future
Results - Dependence on Networking Product Line".
<PAGE>
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 Products
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. 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(R) Products
The Company's innovative QuickSwitch(R) 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 requirement for no directional control. QuickSwitch(R) devices
provide higher performance alternatives to FCT and other families of interface
logic where high current drive capability is not required. In addition, they 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(R) 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(R) offering includes 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(R) family by incorporating
features of the QuickSwitch(R) design into higher integration products, such as
a series of crossbar switches and QuickScanTM devices for boundary scan test
applications.
Clock Management Products
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. See
"Factors That May Affect Future Results - Year 2000 Compliance."
<PAGE>
FIFO Memory Products
In October 1997, the Company made a strategic decision to exit the FIFO
memory product market. This decision was made in order to focus the Company's
resources on other faster growing segments of the semiconductor industry,
including networking and telecommunication markets. The FIFO market accounted
for a small percentage of the Company's revenues. As part of this decision, the
Company wrote off approximately $2.5 million of inventory and other costs in the
fourth quarter of fiscal 1997 primarily related to the FIFO product line.
Customers and Applications
QSI's customers are performance-oriented systems manufacturers in
industries such as networking, personal computers and workstations. QSI ships
products to customers on an OEM (Original Equipment Manufacturer) basis and to
customers through the Company's distributors.
A relatively small number of customers have accounted for a significant
portion of the Company's net revenue in each of the past several fiscal years.
In fiscal 1997 four customers accounted for over 35% of net revenues, compared
to 9 customers which accounted for over 35% of net revenues in fiscal 1996. In
fiscal 1995 sales to the Company's top ten systems manufacturer customers
accounted for more than half of total net revenues. See "Factors That May Affect
Future Results - Customer Concentration."
Backlog
QSI primarily manufactures and markets standard products. Sales are
generally made pursuant to purchase orders, which are frequently revised to
reflect changes in customer's requirements. As of September 28, 1997, the
Company's backlog was approximately $15.3 million, as compared to approximately
$13.0 million at September 29, 1996. 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/Milgray Industries. Domestic distributors accounted for approximately 19%
of the Company's net revenues during fiscal 1997 as compared to 26% in 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 North American 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. See "Factors That May Affect Future Results -
Customer Concentration."
To assist the Company's distributor and independent sales
representative, the Company has 6 sales professionals located at the Company's
sales offices in northern and southern California, Georgia, Massachusetts and
the United Kingdom as of September 28, 1997. The Company also employs field
application engineers who work directly with the Company's customers to assist
them in designing systems incorporating the Company's products.
<PAGE>
Sales outside of the United States accounted for approximately 44%, 43%
and 29% of net product sales for fiscal years ended 1997, 1996, and 1995,
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. See
"Factors That May Affect Future Results - Dependence on Manufacturing
Representatives and Distributors."
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, Level One 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 networking markets,
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. The Company has been developing capacity for the fabrication, since
the acquisition of the Wafer Fabrication facility in February 1996. Many of the
Company's competitors already have this capacity which may provide such
companies with more reliable manufacturing capability, shorter development and
manufacturing cycles and time-to-market advantages. Competitors having their own
wafer fabrication facilities, or access to suppliers having such facilities,
with 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.
<PAGE>
As is typical in the semiconductor industry, competitors of the Company
have developed 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.
Historically, average selling prices ("ASPs") in the semiconductor
industry have decreased over the life of the particular product. The willingness
of prospective customers to design the Company's products into their products
depends to a significant extent upon the ability of the Company to price its
products at a level that is cost effective for such customers. If the Company is
unable to reduce its costs sufficiently to offset declines in ASPs or is unable
to introduce new higher performance products with higher ASPs or is unable to
introduce new higher performance products with higher, the Company's operating
results would be materially and adversely affected. Any yield or other
production problems, shortages or supply that increase the Company's
manufacturing costs, or failure to reduce manufacturing costs, would have a
material adverse effect on the Company's operating results.
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
In February 1996, the Company purchased a fully functional wafer
fabrication facility and product design center located in Australia. The Company
receives a significant amount of its wafer requirements for its logic and memory
products from this facility. QSI believes that maintaining its own wafer
fabrication capability provides a reliable source of supply of semiconductors
and ability to develop new products and technology. To increase its competitive
position, the Company has introduced programs to reduce manufacturing cycle
time, improve yields and lower costs. See "Factors That May Affect Future
Results - Risks Associated With Operating Australian Fabrication Facility."
Additionally, a majority of the Company's more advanced, smaller
geometry circuits semiconductor products are fabricated by Taiwan Semiconductor
Manufacturing Company ("TSMC"). The remainder of the Company's products are
manufactured by Seiko Instruments Inc. ("Seiko") and Ricoh Corporation
("Ricoh"). The Company utilized Yamaha Corporation ("Yamaha") for wafer capacity
prior to fiscal 1997. See "Factors That May Affect Future Results - Dependence
on Fabrication, Assembly and Test Subcontractors."
<PAGE>
In connection with fabrication arrangements with Seiko and Yamaha, the
Company has granted 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 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 and the right of Seiko 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 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.
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 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. See "Factors That May Affect Future Results
- - Dependence on Fabrication Assembly and Test Subcontractors."
<PAGE>
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 28, 1997, the Company had 49
employees involved in research and product development activities.
The Company's research, development and engineering expenses in the
fiscal years 1997, 1996 and 1995 were approximately $9.3 million, $7.0 million
and $6.3 million, respectively. The Company expects that it will continue to
spend substantial funds on research and development in order to maintain its
competitiveness in new product and process technology development.
Although the Company believes that in certain product lines it may be
desirable to apply its QCMOS process at smaller geometries 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 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. See "Factors That May Affect Future Results -
Dependence on New Products."
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.
<PAGE>
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 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 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. See "Factors That May Affect Future Results - Patents and
Proprietary Rights ."
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. ("QSA"), included a fully
operational wafer foundry business and product design center.
Employees
At September 28, 1997, the Company had approximately 206 full-time
employees, including 32 in sales, marketing and customer support, 102 in
manufacturing, assembly and testing, 49 in research and product development, and
23 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 certain employees of the Company's wafer fab facility are
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 28, 1997 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
Albert Enamait 58 Vice President of Sales and Marketing
Edward J. Bradley, Jr. 54 Vice President of Manufacturing Operations
John P. Goldsberry 43 Vice President - Finance and
Chief Financial Officer (1)
Richard A. Bottomley 33 Controller
Andrew J. S. Kang 46 Director
Robert L. Puette 55 Director
Masaharu Shinya 54 Director
David D. Tsang 55 Director
(1) Mr. Goldsberry resigned from the Company effective November 19, 1997 to
pursue other interests.
Mr. Chiu, one of the Company's founders, has served as the Company's
Chairman of the Board since its 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
also has served as a director of a privately owned company, Capella Micro
Systems, since December 1996. 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. Since May 1995, Mr. Gupta has served as a director of
YieldUp International Corp. He also serves as a director of Innovision Lab, a
privately held company. 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.
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.
<PAGE>
Mr. Edward J. Bradley, Jr. joined the Company in January 1993. Before his
appointment to Vice President of Operations 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. John Goldsberry has served as Vice President - Finance and Chief
Financial Officer of the Company from March 1997 through November 17, 1997.
During 1996, Mr. Goldsberry served as Vice president and Chief Financial Officer
of DSP Group, which develops and markets digital signal processors and speech
compression algorithms. From 1992 to 1995 Mr. Goldsberry served as Vice
President and Chief Financial Officer of the Good Guys, a computer electronics
retailer. Prior to 1992, Mr. Goldsberry held various positions at Saloman
Brothers and Morgan Stanley. Mr. Goldsberry received his bachelor's degree in
applied mathematics from Harvard College and his Ph.D. in business economics
from Harvard University.
Mr. Richard A. Bottomley has assumed the interim role of Chief Financial
Officer of the Company since the resignation of John Goldsberry on November 19,
1997. Mr. Bottomley has been the Controller of the Company since August 1996.
Mr. Bottomley has served in a similar position with Actel Corporation, and prior
to that was with Ernst & Young LLP for seven years.
Mr. Kang has served as a director of the Company since 1992. In 1990, Mr.
Kang founded Technology Associates Corp., a Taiwanese venture capital company
and was its President until October, 1997. Since October, 1997 Mr. Kang has been
the Managing Director of Technology Associates Management Co., Ltd., which
manages Techgains venture fund. Mr. Kang also is serving as the president of
Natural Polymer International Corp., a Dallas based biodegradable material
research manufacturing company. Mr. Kang holds a MA degree from Soochow
University, Taiwan, and MSM from ADL Management Education Institute, Cambridge,
MA.
Mr. Puette has served as a director of the Company since 1992. Mr. Puette
is the President of Centigram Corporation, a communications solution company.
Mr. Puette was the Chairman, President and Chief Executive Officer of NetFRAME
Systems, Inc., a computer company from 1995 to 1997. 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. Mr. Puette holds a BSEE degree from
Northwestern University and a MSDR degree from Stanford University.
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 and from 1988
to 1990, as Senior Managing Director. Kanematsu Semiconductor Corporation is a
subsidiary of Kanematsu Corporation, a large Japanese trading house. Mr. Shinya
also serves on the Board of Directors of several privately held companies.
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. Since January 1997, he has also been a director of
ASE Test Ltd. 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 which
includes approximately 3,000 square feet of facilities for the Company's test
operations. In July 1997, the Company extended its current lease agreement
through March 2001. 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.
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 1997 and
1996.
High Low
1997
First Quarter $ 9.25 $ 6.13
- --------------------------------------------------------------------------------
Second Quarter $10.13 $ 7.00
- --------------------------------------------------------------------------------
Third Quarter $11.75 $ 7.25
- --------------------------------------------------------------------------------
Fourth Quarter $16.75 $10.38
- --------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------
The Company has never paid cash dividends and has no present intention to pay
cash dividends.
<PAGE>
Holders of Record
As of September 28, 1997, there were 108 shareholders of record of the
Company's Common Stock. Since many holder's are listed under their brokerage
firms' names, the actual number of shareholders is higher.
On August 26, 1997, the Board of Directors of the Company approved and
adopted the Company's Preferred Shares Rights Agreement dated as of August 29,
1997 between the Company and BankBoston, N.A. as Rights Agent (the "Rights
Agreement"). The rights, privileges and preferences of the Company's Preferred
share Purchase Rights are described in the Company's Registration Statement on
Form 8-K filed with the Securities and Exchange Commission on September 15,
1997.
Item 6. Selected Financial Data
<TABLE>
<CAPTION>
Years Ended September 30,
(In thousands, except per share data)
<S> <C> <C> <C> <C>
------------------------------------------------------------------
1997 1996 1995 1994 1993
------------------------------------------------------------------
REVENUES:
Net product revenues $62,691 $44,688 $46,189 $36,247 $26,723
-------------------------------------------------------------------------------------------------------
Technology revenues __ __ __ 719 958
-------------------------------------------------------------------------------------------------------
Total revenues 62,691 44,688 46,189 36,966 27,681
- ---------------------------------------------------------------------------------------------------------------
Operating income (loss) 720 (3,530) 6,386 5,189 3,122
- ---------------------------------------------------------------------------------------------------------------
Interest, net (398) 77 520 (192) (377)
- ---------------------------------------------------------------------------------------------------------------
Income (loss) before provision (benefit) 322 (2,015) 6,906 4,997 2,745
for taxes
- ---------------------------------------------------------------------------------------------------------------
Net income (loss) 210 (1,310) 4,766 3,243 2,513
- ---------------------------------------------------------------------------------------------------------------
Net income (loss) per share (1) $0.03 $ (0.24) $ 0.84 $ 0.79 $
--
- ---------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding 6,989 5,524 5,649 4,104 $
--
- ---------------------------------------------------------------------------------------------------------------
Working capital $27,775 $14,103 $27,379 8,460 5,857
- ---------------------------------------------------------------------------------------------------------------
Total assets 69,832 52,521 42,779 23,146 19,371
- ---------------------------------------------------------------------------------------------------------------
Long-term obligations (less current portion) 7,202 2,840 5 493 1,919
- ---------------------------------------------------------------------------------------------------------------
Shareholders' equity 43,637 30,345 31,221 11,888 8,495
- ---------------------------------------------------------------------------------------------------------------
Dividends $ $ $ $ $
-- -- -- -- --
===============================================================================================================
</TABLE>
See " Management's Discussion and Analysis and notes to consolidated financial
statements."
(1) Fiscal 1993 statements of operations omits the historical net income per
share as it was not presented in the initial public offering registration
statement. Pro forma net income is presented for 1994.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
This discussion summarizes the significant factors affecting the Company's
consolidated operating results, financial condition, liquidity and cash flows
during the three year period ended September 30, 1997. The following discussion
should be read in conjunction with the five year summary of selected financial
data and the Company's consolidated financial statements and notes thereto.
The following table sets forth certain financial data from the Consolidated
Statements of Operations as a percentage of net revenues for the periods
indicated.
Years Ending September 30,
1997 1996 1995
Net revenues 100% 100% 100%
Cost of revenues 63.9 67.6 50.9
Gross margin 36.1 32.4 49.1
Operating expenses
Research and development 14.8 15.7 13.7
Sales and marketing 13.3 15.6 14.8
General and administrative 6.9 9.0 6.8
Total operating expenses 35.0 40.3 35.3
Operating income (loss) 1.1 (7.9) 13.8
Other income -- 3.2 --
Interest, net (0.6) 0.2 1.1
Income (loss) before provision (benefit) 0.5 (4.5) 14.9
for taxes
Provision (benefit) for taxes 0.2 (1.6) 4.6
Net income (loss) 0.3% (2.9)% 10.3%
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 workforce, customer base, and
goodwill, which are being amortized over five years. The Company had incurred
approximately $610,000 of amortization expense in fiscal 1997 ($375,000 in
fiscal 1996) related to the acquisition. AWA Limited was issued 1,000 redeemable
preference shares of QSA at an issue price of $1,125 per share which may be put
by AWA Limited back to QSA pursuant to the terms of a put option deed dated
January 12, 1996. In July 1997, the Company redeemed 426 preference shares for
approximately $3.0 million dollars. The Company will redeem the final 574
preference shares for approximately $4.0 million (including interest charges) in
January 1998. These redeemable preference shares have been categorized as debt
on the balance sheet and discounted to their present value. 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.
Net Revenues
Net revenues in fiscal 1997 were $62.7 million, increasing by 40% over net
revenues in fiscal 1996. This compares with a decrease of net revenues of 3% in
fiscal 1996 compared to fiscal 1995. The increase in net revenues during fiscal
1997 was mainly due to shipments of proprietary networking and clock management
products which began shipping in fiscal 1997 and accounted for over 30% of
fiscal 1997 revenues, and increased unit shipments in logic products, partially
offset by lower average selling prices. The decrease in net revenues from fiscal
1996 to fiscal 1995 was mainly due to a substantial decline in the overall
average selling prices partially offset by sales from 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 networking, clock management
and interface logic devices are expected to continue to account for a
significant majority of revenues in the foreseeable future. To increase net
revenues, the Company seeks to increase unit sales of existing products,
principally by reducing prices in conjunction with cost reduction programs, 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, 19%, 26% and 21% of the Company's net revenues during fiscal
1997, 1996 and 1995, respectively. The decrease in percentage of net revenues
through distribution in fiscal 1997 was mainly due to a majority of the
networking products being shipped direct from QSI. Sales by Arrow Electronics
Inc. accounted for approximately, 12%, 19% and 16% of net revenues during fiscal
1997, 1996 and 1995, respectively, and the remainder of domestic distributor
sales were made primarily through Bell Microproducts Inc. ("Bell") and
Nu-Horizons Electronics Corp. Recognition of sales to these 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.
Export sales, primarily consisting of sales to countries in Europe and the Far
East, constituted 42%, 38% and 29% of net revenues for fiscal 1997, 1996 and
1995, respectively.
<PAGE>
Gross Margin
The following table sets forth the Company's net revenues and gross margin:
Years Ended September 30,
1997 1996 1995
(In thousands, except percentage data)
Net revenues $62,691 $44,688 $46,189
Cost of revenues 40,073 30,226 23,524
Gross margin $22,618 $14,462 $22,665
Gross margin as a percentage of net 36.1% 32.4% 49.1%
revenues
The Company's cost of 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, quality
assurance functions performed by the Company, and writedowns of inventory.
Gross margin in fiscal 1997 was 36% of net revenues, compared with 32% of net
revenues in fiscal 1996, and 49% of net revenues in 1995. The increase from
fiscal 1997 to 1996 in gross margin resulted from changes in product mix,
specifically, the sale of higher margin networking and clock management products
and the Company's cost reduction programs. Gross margin in fiscal 1997 includes
a $2.5 million inventory adjustment recorded in the fourth quarter, mainly due
to a decision by management to exit the FIFO product line. Prior to the
inventory writedown, gross margin was 40% for fiscal 1997. The decline from
fiscal 1996 to 1995 in gross margin resulted principally from the recording of
$2.8 million 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 Company is likely to face potential inventory risks and
writedowns. 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 markets for the Company's products are subject to severe price competition
and price declines. There can be no assurance that the Company will succeed in
reducing its product costs rapidly enough to maintain or increase its gross
margin level. Due to price declines, mainly in the networking product line,
gross margin as a percent of net revenues will decrease in the first quarter of
fiscal 1998 compared to the fourth quarter of fiscal 1997, prior to the
inventory write-off, and the Company will incur a loss for the quarter.
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 1998 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.
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.
<PAGE>
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
1997 were $9.3 million, or 15% of net revenues, compared with $7.0 million, or
16% of net revenues in fiscal 1996, and $6.3 million, or 14% of net revenues in
fiscal 1995. The increase in spending for fiscal 1997 was mainly due to
increased spending on new product development and process technology. These
costs included higher material and testing charges, and increased payroll
related expenses. 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 beginning in February 1996. 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. All the Company's research and development costs are
expensed as incurred. The Company currently expects to incur higher research and
development expenses in fiscal 1998.
The Company believes that future 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 net revenues.
Sales and Marketing
Sales and marketing expenditures in fiscal 1997 were $8.3 million, or 13% of net
revenues, compared with $7.0 million, or 16% of net revenues in fiscal 1996, and
$6.8 million, or 15% of net revenues in fiscal 1995. Sales and marketing
expenses in fiscal 1997 increased mainly due to increased sales commissions due
to higher revenues, increased payroll related expenses and marketing programs to
support the launch of new products. 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 Company expects to incur higher sales and marketing
expenses in fiscal 1998.
<PAGE>
General and Administrative
General and administrative expenditures in fiscal 1997 were $4.3 million, or 7%
of net revenues, compared with $4.0 million, or 9% of net revenues in fiscal
1996, and $3.1 million, or 7% of net revenues in fiscal 1995. General and
administrative expenditures in fiscal 1997 remained flat compared to fiscal
1996. The percentage decrease reflects management's continued efforts to control
spending. 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 Company expects to incur higher
general and administrative expenses in fiscal 1998.
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 expense for fiscal 1997 was $398,000 compared to net interest
income of $77,000 in fiscal 1996. The decrease in net interest income was due to
increased interest expense associated with an increase in notes payable used to
purchase property and equipment. 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.
Provision (Benefit) for Taxes
The Company's effective tax rate was 35%, 35% and 31% for fiscal 1997, 1996 and
1995, respectively. Significant items impacting the 1997 effective tax rate
include state income taxes, research and development credits and nondeductible
amortization of interest. The Company recorded a tax benefit for fiscal 1996
based on available carryback potential. The increase in the effective tax rate
in fiscal 1996 was due primarily to the recognition of deferred tax assets
previously subject to valuation allowances during fiscal 1995.
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 $17.3 million to a total of $69.8 million at year end. Cash, cash
equivalents, and short-term investments increased $5.7 million; accounts
receivable increased $1.1 million; property and equipment, net, increased $4.8
million; and goodwill and other assets decreased $856,000; current liabilities
decreased $285,000; long-term obligations to a related party increased to $7.2
million; and shareholders equity increased $13.3 million.
<PAGE>
The increase in cash, cash equivalents and short-term investments was
primarily due to cash raised in two private placements of common stock totaling
$12.2 million during fiscal 1997, offset by payments totaling $4.2 million made
to AWAM under the purchase agreement and payments made for notes payable.
Additionally, $199,000 was used in operating activities and $3.3 million was
used for the purchase of wafer fabrication equipment at QSA and other capital
equipment purchased during fiscal 1997. Capital expenditures were $3.3 million
in fiscal 1996. See Note 3 and 4 of Notes to Consolidated Financial Statements.
Accounts receivable increased at September 30, 1997 mainly due to a higher net
revenues generated in fiscal 1997. Accounts payable increased by $2.2 million
during fiscal 1997 because of increases in operating activities to support the
growth in net revenues.
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 in December 1996, and
converted the notes issued for such amount into 439,758 shares of the Company's
common stock. The Company decided not to sell, and one of the investors agreed
not to buy $2 million of the notes. In May 1997, the Company completed a private
placement of 108,000 units, each consisting of ten shares of the Company's
common stock and a one-year warrant to purchase one additional share of the
Company's common stock for $8.50. The units were priced at $85 per unit for a
total of $9.2 million in cash. The Company has used a certain amount of the
proceeds for payment on the debt incurred in connection with the acquisition of
certain assets of AWAM, general corporate purposes and working capital.
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. The Company does expect to be out of compliance
with certain loan covenants at its $5.0 million unsecured line of credit in the
first quarter of fiscal 1998. 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 5% during fiscal 1997 mainly due to the
growth of the business. The Company had 206 employees at the end of fiscal 1997
as compared to 197 at the end of the prior fiscal year.
<PAGE>
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. Periodically, 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. Inflation has not had a
significant impact on the Company.
Factors That May Affect Future Results
Cautionary Statement Concerning Forward Looking Statements
This report contains certain forward-loking 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 Section 21E of
and Rule 9b-6 under the Securities Exchange Act of 1934. Such forwrd-looking
statements include, without limitations, statements regarding the Company's
expectations, intentions or future strategies and involve known and unknown
risks, uncertainties and other factors. The following 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. All forward
looking statements included in this document are based on information available
to the Company on the date hereof, and the Company assumes no obligations to
update any such forward looking statements. Actual results could differ
materially from those projected in the forward-looking statements as a result of
the risk factors set forth below and in the documents incorporated by reference
herein. In evaluating the Company's business, propspective investors should
carefully consider the following risk factors in addition to the other
information set forth herein or incorporated herein by reference.
Potential Declines in Operating 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 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) 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 pollution regulation or
disposal of environmentally hazardous waste and events limiting production, such
as fires or other damage, and the inability to keep production at a high level;
(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 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, average selling prices "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 inASPs 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. Dependence on QSFCT and QuickSwitch Product
Lines
A substantial majority of the Company's net 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 a significant portion of the Company's
revenues for the foreseeable future. The demand for such products may be sharply
reduced by competition and 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.
<PAGE>
Dependence on Networking Product Line
During fiscal 1997, the Company commenced shipping its advanced CMOS Fast
Ethernet transceiver chips that provide high integration solutions for the
adapter, repeater, switch and card bus markets, and ATM mux/demux for the ATM
multiplexer and switch markets. These products are in the early stages of
production and test results may vary more than for products in later stages of
production. There can be no assurance that production yields will meet
management projections or that the performance of these products will meet
actual specifications. Additionally, demand for such products may not meet the
Company's expectations. In addition the demand for such products may decline as
competition and availability increase, and more advanced products are
introduced.
The Company commenced shipping these units to its customers with their
approval prior to the completion of qualification during fiscal 1997. Management
has made estimates on future returns of these products and provided necessary
reserves. However, these estimates could change and the actual return rate could
be higher. Should the Company not complete the qualification process on a timely
basis or if the performance of these products do not meet specifications, there
is no assurance that the customer will not cancel existing orders or if the
performance of these products does meet actual specifications. In addition,
functionality and demand for such products may not meet the Company's or
customers expectations, and the demand and pricing for such products will
decline as competition and availability increase, and more advanced products are
introduced.
During the early stage of new product introductions, the parts are generally
marked as "engineering samples" and shipped to potential customers for
evaluation. Based on successful evaluation by the customer, products are shipped
in volume to customers prior to the successful completion of qualification. Upon
successful completion of qualification the engineering samples markings are
removed from the product. There is no assurance that upon completion of
successful qualification, current and future customers will accept product
marked as engineering samples. If the Company is unable to sell through all such
marked parts, there is no guarantee that the Company will not need to writedown
all such inventory on hand or in production to zero or minimal value.
Dependence on New Products
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 could 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.
<PAGE>
Risks Associated with Operating Australian Fabrication Facility
In February 1996, the Company purchased a fully functional wafer fabrication
facility and product design center located in Australia. The Company receives a
significant amount of its wafer requirements for its logic and memory products
from this facility. Any disruption of the Company's wafer fab facility or the
Company's inability to keep the production of wafers at a high level due to
technical factors or lack of customer demand could have a materially adverse
impact on the Company's operations.
The process technology for the fabrication of the Company's wafers at this
facility is highly complex and sensitive to dust and other contaminants.
Although the fabrication process is highly controlled, the equipment may not
perform flawlessly. Minute impurities, difficulties in the production process or
defects in the masks can cause a substantial percentage of the wafers to be
rejected or individual die on each wafer to be nonfunctional. Accordingly, any
failure by the Company to achieve acceptable product yields could have a
material and adverse effect on the Company's operations results.
Raw materials essential to the Company's wafer fabrication business are
generally available from multiple sources and theCompany has thus far not
experienced production problems or delays due to shortages in materials or
components. There can be no assurance, however, that future shortages will not
occur; any such shortages could have a material adverse effect on the Company's
business, financial condition or results of operations.
Government regulations impose various environmental controls on the storage, use
and disposal of chemicals and gases used in semiconductor processing. Although
the Company strives to conform the activities of its manufacturing facilities to
applicable environmental regulations, there can be no assurance that the Company
will not incur unanticipated future costs based on inadvertent violations of
such regulations or on the implementation of more stringent regulations in the
future.
Dependence on fabrication, Assembly and Test Subcontractors
A substantial number of the wafers for the Company's semiconductor products
are fabricated by Taiwan Semiconductor Manufacturing LTD. ("TSMC"), and a
limited number of wafers are manufactured by Seiko Instruments Inc. ("Seiko")
and Ricoh Corporation "("Ricoh"). 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 these suppliers, 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 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
quality 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.
Risks of International Sales
The Company purchases a significant amount of its semiconductor wafers and
substantially all of its assembly services from foreign suppliers. 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 from time to time 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.
<PAGE>
Patents and Proprietary Rights
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.
Dependence on Key Personnel
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.
Customer Concentration
A relatively small number of customers have accounted for a significant portion
of the Company's net revenue in the past. 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.
Dependence on Manufacturer Representatives and Distributors
The Company markets and distributes its products primarily through
manufacturers' representatives and independent distributors. 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 distributors or to carry the product
lines of the Company's competitors, could have a material effect on the
Company's operating results.
Year 2000 Compliance
Many currently installed computer systems and software products are coded to
accept only two digit entries in the date code field. Beginning in the year
2000, these date code fields will need to accept four digit entries to
distinguish 21st century dates from 20th century dates. As a result, in
approximately two years, computer systems and/or software used by many companies
may need to be upgraded to comply with such "Year 2000" requirements.
Significant uncertainty exists concerning the potential effects associated with
such compliance. Any year 2000 compliance problem of either the Company, its
suppliers, its service providers or its customers could result in a materially
adverse effect on the Company's business, financial condition and operating
results.
Manufacturing Systems
The Company currently has separate manufacturing and financial data collection
systems. These systems, which are manufactured by different vendors, are not
fully integrated together and require significant amounts of manual
reconciliations and reporting. The Company is currently reviewing alternative
solutions, reporting and controls in order to minimize the chance of error in
the financial statements. There is no guarantee that the Company will be able to
develop or implement an acceptable solution or that an error in the current or
future financial statements may not occur or not be recognized timely. Any
failure to develop or implement an acceptable solution or an error in the
current or future financial statements could have a materially adverse effect on
the Company's operating results.
Cyclical Nature of Semiconductor Industry
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 overcapacity. 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.
Volatility of Company's 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.
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.
<PAGE>
Item 8. Financial Statements and Supplementary Data
Quality Semiconductor, Inc.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
September 30,
1997 1996
Assets
Current Assets:
Cash and cash equivalents $9,403 $4,930
Short-term investments 3,656 2,403
Accounts receivable, net of allowances of
$856 and $173 at September 30, 1997 and 1996,
respectively 6,939 5,940
Accounts receivable from related parties 773 689
Other receivables 1,036 719
Inventories 17,689 13,984
Prepaid expenses 1,963 532
Deferred tax assets 3,364 2,239
Total current assets 44,823 31,436
Property and equipment, net 22,859 18,079
Goodwill and other assets 2,150 3,006
Total assets $69,832 $52,521
Liabilities and Shareholders' Equity Current liabilities:
Accounts payable $5,489 $2,749
Accounts payable to related parties 222 747
Accrued compensation 1,925 1,212
Other accrued liabilities 733 1,039
Income taxes payable -- 1,707
Deferred rent 18 201
Deferred income on shipments to distributors 2,995 2,018
Long-term obligations to related party due 1,684 667
within one year
Redeemable preference shares of subsidiary 3,982 6,993
Total current liabilities 17,048 17,333
Long-term obligations to related party 7,202 2,840
Deferred tax liabilities 1,945 2,003
<PAGE>
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--7,393,076 and 5,536,168 7 5
Additional paid in capital 41,600 28,348
Retained earnings 2,221 2,412
Deferred compensation (191) (420)
Total shareholders' equity 43,637 30,345
Total liabilities and shareholders' equity $69,832 $52,521
See accompanying notes to consolidated financial statements.
<PAGE>
Quality Semiconductor, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Years Ended September 30,
1997 1996 1995
Net revenues $62,691 $44,688 $46,189
Cost of revenues 40,073 30,226 23,524
Gross margin 22,618 14,462 22,665
Operating expenses:
Research and development 9,281 6,982 6,326
Sales and marketing 8,323 6,986 6,808
General and administrative 4,294 4,024 3,145
Total operating expenses 21,898 17,992 16,279
Operating income (loss) 720 (3,530) 6,386
Other income -- 1,438 --
Interest income 724 510 678
Interest expense (1,122) (433) (158)
Income (loss) before provision (benefit) 322 (2,015) 6,906
for taxes
Provision (benefit) for taxes 112 (705) 2,140
Net income (loss) $210 $(1,310) $4,766
Net income (loss) per share $0.03 $(0.24) $ 0.84
Shares used in computing per share amounts 6,989 5,524 5,649
See accompanying notes to consolidated financial statements.
<PAGE>
Quality Semiconductor, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Years Ended September 30,
<S> <C> <C> <C>
1997 1996 1995
Operating Activities
Net income (loss) $210 $(1,310) $4,766
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 5,372 3,977 2,305
Deferred income taxes, net (1,183) (1,021) (676)
Deferred compensation amortization 229 228 228
Changes in operating assets and liabilities:
Accounts and related parties receivable, net (1,083) (778) (2,096)
Other receivables (317) 277 (939)
Inventories (3,705) (510) (3,973)
Prepaid expenses (1,431) (66) 345
Accounts payable including related parties 2,215 (1,407) 1,008
Income taxes payable (1,707) (282) 1,006
Accrued compensation 713 (536) (71)
Other accrued liabilities and deferred rent (489) 806 (138)
Deferred income on shipments to distributors 977 120 39
Total adjustments (409) 808 (2,962)
Net cash provided by (used in) operating activities (199) (502) 1,804
Investing Activities
Purchase of certain assets of AWAM -- (5,005) --
Capital expenditures, net (3,340) (3,296) (2,161)
Purchase of short-term investments (5,686) (5,935) (109,744)
Sales and maturities of short-term investments 4,433 13,012 100,264
Deposits and other assets 246 (126) 50
Net cash used in investing activities (4,347) (1,350) (11,591)
Financing Activities
Principal payments on long-term debt and
preference shares (4,235) (472) (1,148)
Net proceeds from promissory notes 2,850 -- --
Net proceeds from issuance of common stock 10,633 635 14,328
Repurchase of common stock (229) (819) --
Principal payments on capital lease obligations -- (199) (276)
Proceeds from reduction in notes receivable
from shareholders -- -- 11
Net cash provided by (used in) financing activities 9,019 (855) 12,915
Net increase (decrease) in cash and cash equivalents 4,473 (2,707) 3,128
Cash and cash equivalents at beginning of period 4,930 7,637 4,509
Cash and cash equivalents at end of period $9,403 $4,930 $7,637
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
Quality Semiconductor, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(In thousands)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Years Ended September 30,
1997 1996 1995
Supplemental Disclosures of Cash Flow Information Cash paid during this period
for:
Interest $1,091 $107 $195
Taxes $2,234 $724 $1,442
Supplemental Disclosures of
Noncash Investing and Financing Activities
Redeemable preference shares of a subsidiary issued as
partial consideration for certain assets of AWAM $-- $6,300 $--
Conversion of promissory notes into common stock $3,000 $-- $--
Acquisition of property and equipment through
issuance of long term debt to related party $6,603 $3,668 $--
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
Quality Semiconductor, Inc.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands)
<TABLE>
<CAPTION>
Convertible
Preferred Common Stock Notes Total
Stock AdditionRetained ReceivaShareholders'
Paid Earnings Deferredfrom
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
in
Shares Amt Shares Amt Capital (Deficit)CompensaSharehoEquity
Balance at September 30, 1994 2,176 $2 1,315 $2 $14,059 $(1,288) $(876) $(11) $11,888
Conversion of preferred stock (2,176) (2) 2,176 2 -- -- -- -- --
to common stock
Sale of common stock for cash -- -- 1,984 1 14,327 -- -- -- 14,328
Repayment of notes receivable -- -- -- -- -- -- -- 11 11
Amortization of -- -- -- -- -- -- 228 -- 228
deferredcompensation
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 -- -- -- -- 81 -- -- -- 81
optionexercises
Repurchase of common stock -- -- (135) (1) (818) -- -- -- (819)
Insurance of warrants -- -- -- -- 65 -- -- -- 65
Amortization of deferred -- -- -- -- -- -- 228 -- 228
compensation
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
Sale of common stock, -- -- 1,890 2 13,296 -- -- -- 13,298
conversion of promissory
notes, and warrants for cash
Tax benefit from stock option -- -- -- -- 185 -- -- -- 185
exercises
Repurchase of common stock -- -- (33) -- (229) -- -- -- (229)
Amortization of deferred -- -- -- -- -- -- 229 -- 229
compensation
Translation adjustment -- -- -- -- -- (401) -- -- (401)
Net income -- -- -- -- -- 210 -- -- 210
Balance at September 30, 1997 -- $-- 7,393 $7 $41,600 $2,221 $(191) $-- $43,637
</TABLE>
<PAGE>
Organization and Summary of Significant Accounting Policies
Quality Semiconductor, Inc. (the Company), a California corporation, is
engaged in manufacturing, 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 1997, 1996, and 1995 ended on September 28, 29, and 24, 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.
Certain amounts presented in the financial statements of prior years have
been reclassified to conform to the current presentation for 1997.
Impact of Recently Issued Accounting Standards
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard (SFAS) No. 128, "Earnings per Share"
(EPS), which simplifies existing computational guidelines, revises disclosure
requirements, and increases the comparability of earnings per share on an
international basis. Management has not yet evaluated the effects of this change
in computational guidelines on the Company's EPS. SFAS No. 128 is effective for
periods ending after December 15, 1997 and requires restatement of all prior
period EPS data presented. The Company will adopt SFAS No. 128 in its first
quarter of fiscal year 1998.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which establishes standards for reporting and display of comprehensive
income and its components (revenue, expenses, gains, and losses) in a full set
of general-purpose financial statements. The Company will adopt SFAS No. 130 in
its fiscal year 1999. In June 1997, the FASB issued SFAS No. 131, "Disclosure
about Segments of an Enterprise and Related Information," which changes the way
public companies report information about operating segments. SFAS No. 131,
which is based on the management approach to segment reporting, establishes
requirements to report selected segment information quarterly and to report
entity-wide disclosures about products and services, major customers, and the
material countries in which the entity holds assets and reports revenue.
Management has not yet evaluated the effects of this change on its reporting of
segment information. The Company will adopt SFAS No. 131 in its fiscal year
1999.
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ materially from those 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. Debt securities are classified as available-for-sale and 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, 1997 and 1996 are summarized as follows (in thousands):
September 30,
1997 1996
Cash and cash equivalents
Cash $2,243 $1,445
Commercial paper 2,400 2,437
Municipal bonds 4,760 1,048
Cash and cash equivalents $9,403 $4,930
Short-term investments
Municipal bonds $3,656 $2,403
Short-term investments $3,656 $2,403
Both gross unrealized gains and losses as of September 30, 1997 and 1996
and realized gains and losses on sales of securities for the year ended
September 30, 1997 and 1996 were immaterial. At September 30, 1997 and 1996,
fair market value approximates amortized cost.
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 domestic 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.
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. The Company has adopted Statement of
Financial Accounting Standards No. 121 (SAS 121), "Accounting for the impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS 121
requires impairment losses to be recorded on long-lived assets used in
operations, such as property and equipment, when indicators of impairment are
present and the undiscounted cash flows estimated to be generated by those
assets are less than the carrying amount of the assets. The adoption had no
material effect on the Company's financial statements.
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.
The Company commenced shipping certain networking products to its customers
with their approval prior to the completion of qualification during fiscal 1997.
Management has made estimates on future returns of these products and provided
necessary reserves. However, these estimates could change and the actual return
rate could be higher. During the early stage of new product intoductions, the
parts are generally marked as engineering samples" and shipped to potential
customers for evaluation. Based on successful evaluation by the customer,
products MAY BE shipped customers prior to the successful completion of
qualification. Upon successful completion of qualification the engineering
samples markings are removed from the product. There is no assurance that upon
completion of successful qualification, current and future customers will accept
product marked as engineering samples. If the Company is unable to sell through
all such marked parts, there is no guarantee that the Company will not need to
writedown all such inventory on hand or in production to zero or minimal value.
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 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-credit-quality financial institutions and
limits the 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 and are accounted for as
hedges of firm wafer purchase commitments. 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, 1997, there were no contracts oustanding.
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 $577,000, $511,000, and $481,000 in fiscal 1997, 1996, and 1995,
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) and 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,
1997 1996
(In thousands)
Inventories:
Raw materials $5,421 $7,141
Work-in-process 3,770 2,578
Finished goods 8,498 4,265
$17,689 $13,984
Property and Equipment:
Equipment and software $36,631 $27,046
Furniture and fixtures 795 729
Leasehold improvement 1,608 1,717
9,034 29,492
Less accumulated depreciation and amortization 16,175 11,413
$22,859 $18,079
3. Purchase of Business
On February 16, 1996 the Company acquired certain assets of AWA
MicroEectronics 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 an independent valuation, consisted of $8.8 million
of net tangible assets and $3.0 million of intangible assets which were related
to assembled workforce, customer base, and goodwill, which are being amortized
over five years. The Company had incurred approximately $610,000 of amortization
expense in fiscal 1997 ($375,000 in fiscal 1996). AWA Limited was issued 1,000
redeemable preference shares of QSA at an issue price of $1,125 per share which
may be put by AWA Limited back to QSA pursuant to the terms of a put option deed
dated January 12, 1996. In July 1997, the Company redeemed 426 preference shares
for approximately $3.0 million dollars. These redeemable preference shares have
been categorized as debt on the balance sheet and discounted to the present
value. The Company will redeem the final 574 preference shares for approximately
$4.0 million (including interest charges) in January 1998. QSA's results of
operations have been included in the consolidated results of operations since
the date of acquisition.
In November 1996, the Company negotiated a private placement of unsecured,
convertible promissory notes in the amount of $5.0 million of QSA. The Company
received $3.0 million of the total financing in December 1996, and converted the
notes issued for such amount into 439,758 shares of QSI common stock. The
Company decided not to sell, and one of the investors agreed not to buy $2.0
million of the notes.
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. In March 1997, the Company agred to enter into a second
finance agreement with Kanematsu USA Inc. to finance an additional $2.5 million.
These agreements expire March 31, 2001 and the borrowings bear interest at a
rate of 8.5% to 9.25%. There were borrowings of approximately $10.3 million
against these agreements, of which approximately $8.9 million was outstanding at
September 30, 1997.
Future minimum payments on long-term obligations to Kanematsu USA Inc. are as
follows:
September 30, 1997
(In thousands)
1998 $2,910
1999 2,976
2000 2,976
2001 1,488
<PAGE>
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, 1997
(In thousands)
1998 $1,146
1999 1,161
2000 1,206
2001 779
2002 438
Thereafter 3,508
Total rent expense for fiscal 1997, 1996, and 1995 was approximately
$1,343,000, $952,000, and $756,000, respectively.
In June 1997 the Company amended its $5.0 million unsecured line of credit
which expires June 30, 1998. 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 (8.50% at September
30, 1997) plus 0.25% or the three month Libo rate (5.75% at September 30, 1997)
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 September
30, 1997, the Company met all of the covenants under the loan agreement. There
were no borrowings outstanding under this line as of September 30, 1997. The
Company expects to be out of compliance with certain loan covenants during the
first quarter of fiscal 1998.
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 matters 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. In May 1997, the Company issued 108,000 warrants with
an exercise price of $8.50 in conjunction with the completed private placement
of 1,080,000 shares of common stock. The warrants expire in May 1998. Warrants
to purchase approximately 13,000 shares of common stock at $9.00 per share
expired 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.
The following is a summary of option activity (in thousands, except per
share amounts):
<TABLE>
<CAPTION>
Options Outstanding
Available Number of Price Per Weighted
for Grant Shares Share Average
Exercise
Price
<S> <C> <C> <C> <C>
Balance at September 30, 1994 296 750 $0.15-$2.97 $2.08
Authorized 200 -- -- --
Granted (471) 471 $2.70-$15.00 $10.20
Exercised -- (213) $0.45-$7.20 $1.59
Canceled 80 (80) $0.75-$7.20 $3.08
Balance at September 30, 1995 105 928 $0.75-$15.00 $6.23
Authorized 410 -- --
Granted (1,347) 1,347 $4.25-$8.00 $5.25
Exercised -- (116) $0.75-$8.00 $2.09
Canceled 920 (920) $0.75-$15.00 $8.59
Balance at September 30, 1996 88 1,239 $1.20-$7.92 $3.79
Authorized 533 -- -- --
Granted (572) 572 $7.00-$14.00 $8.36
Exercised (312) $0.75-$9.00 $3.39
Canceled 271 (271) $1.20-$8.25 $4.94
Balance at September 30, 1997 320 1,228 $1.20-$14.00 $5.79
Outstanding and exercisable options presented by price range at September 30,
1997 are as follows:
</TABLE>
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
Number Weighted Number
of Options Average Weighted of Options Weighted
Range of Outstanding Remaining Average Exercisable Average
Exercise Prices at 9/30/97 Contractual Life Exercise Price at 9/30/97 Exercise Price
<S> <C> <C> <C> <C> <C>
$1.20 - $1.80 4,394 2.07 $1.34 4,394 $1.34
$2.70 - $2.70 133,839 1.39 $2.70 109,700 $2.70
$2.97 - $2.97 39,999 0.89 $2.97 39,999 $2.97
$4.25 - $4.25 528,741 8.32 $4.25 151,424 $4.25
$7.00 - $8.00 215,796 8.91 $7.68 17,990 $7.63
$8.25 - $8.25 275,321 9.55 $8.25 26,990 $8.25
$8.38 - $10.63 47,500 7.72 $8.94 10,000 $9.0
$13.25 - $13.25 10,000 9.84 $13.25 0 $0.00
$13.88 - $13.88 15,000 9.78 $13.88 0 $0.00
$14.00 - $14.00 10,000 9.78 $14.00 0 $0.00
$1.20 - $14.00 1,280,590 7.73 $5.90 360,497 $4.20
</TABLE>
Options to purchase approximately 360,000 and 321,000 shares were
exercisable at September 30, 1997 and 1996, 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 52,762 and 79,770 shares issued under the 1993 Purchase
Plan in 1997 and 1996, respectively and 24,103 remained available for issuance
as of September 30, 1997. The Company has granted 57,500 options at exercise
prices between $8.00 to $9.00 under the Directors' Plan, 5,000 options were
exercised, and 10,000 cancelled as of September 30, 1997.
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. During fiscal 1997, the Company
repurchased an additional 32,500 shares at an average price of $7.06. In
December 1997, the Company repurchased 30,000 shares at an average price of
$5.19. 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 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,
1997 1996
1989 and 1995 Stock Option Plans 1,548 1,327
1993 Purchase Plan and Directors' Plan 119 177
Warrants 158 63
Total 1,825 1,567
In September 1997, the Company adopted a shareholder rights plan and
declared a dividend distribution of one common stock purchase right for each
outstanding share of common stock. The rights become exercisable based upon the
occurrence of certain conditions including acquisitions of the Company stock,
tender or exchange offers and certain business combination transactions of the
Company. In the event one of the conditions is triggered, each right entitles
the registered holder to purchase a number of shares of common stock of the
Company or, under limited circumstances, of the acquirere. The rights are
redeemable at the Company's option, under certain conditions, for $0.01 per
right and expire September 17, 2007.
<PAGE>
Accounting for Stock Based Compensation
The Company applies APB Opinion No. 25 and related interpretations in
accounting for stock based awards to employees and directors. If compensation
cost for the Company's stock-based compensation plans had been determined
consistent with Statement of Financial Accounting Standards No. 123 (SFAS 123),
the Company's net income (loss) and net income (loss) per share would have been
adjusted to the pro forma amounts indicted below:
September 30,
1997 1996
(In thousands, except per share data)
Net income (loss)
As reported $210 $(1,310)
Pro forma $(764) $(2,088)
Net income (loss) per share
As reported $0.03 $(0.24)
Pro forma $(0.10) $(0.38)
Because the method of accounting prescribed by SFAS 123 has not been
applied to options granted prior to July 1, 1995, the resulting pro forma
compensation cost may not be representative of that to be expected in future
years.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model. The Black-Scholes option valuation model
was developed for use in estimating the fair value of traded options which have
no vesting restrictions and are fully transferable. In addition, the
Black-Scholes model requires the input of highly subjective assumptions
including the expected stock price volatility. Because the Company's stock-based
awards to employees have characteristics significantly different from those of
traded options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion the existing
models do not necessarily provide a reliable single measure of the fair value of
its stock-based awards to employees. The following weighted-average assumptions
for grants during the year ended September 30, 1997 and 1996: risk-free interest
rates of 6.29% and 6.07% for 1997 and 1996, respectively; a dividend yield of 0%
for both years; a weighted-average expected life of 3.0 and 2.9 years for 1997
and 1996; and a volatility factor of the expected market price of the Company's
common stock of .69 for both years. The weighted average grant date fair value
of options granted during 1997 and 1996 was $5.91 and $3.97, respectively.
Compensation cost is estimated for the fair value of the employees'
purchase rights using the Black-Sholes model with the following assumptions for
these rights granted in 1997 and 1996: a dividend yield of 0% for both years; an
expected life of 6 months and 4.5 months for 1997 and 1996; an expected
volatility of .69 for both years; and a risk-free interest rate of 6.29% and
6.07% for 1997 and 1996. The weighted average fair market value of the purchase
rights granted in 1997 and 1996 was $4.20 and $3.06, respectively.
<PAGE>
7. Provision (Benefit) for Taxes
The provision (benefit) for income taxes consists of the following:
September 30,
1997 1996 1995
(In thousands)
Federal
Current $956 $282 $2,352
Deferred (689) (700) (522)
267 (418) 1,830
State
Current -- (122) 464
Deferred (155) (112) (154)
(155) (234) 310
Foreign
Current 339 267 --
Deferred (339) (320) --
-- (53) --
Total $112 $(705) $2,140
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,
1997 1996 1995
(In thousands)
Income taxcomputed at the federal statutory rate $112 $(705) $2,417
State taxes (net offederal effect) (101) (152) 201
Research and development credits (278) (53) --
Goodwill amortization 220 101 --
Non-deductible interest 184 145 --
Tax exemptinterest (70) (140) --
Beefit of operating loss carry forward -- -- (641)
Other individually immaterial items 45 99 163
$112 $(705) $2,140
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, 1997 and
1996 are as follows:
<PAGE>
September 30,
1997 1996
(In thousands)
Deferred tax assets:
Research and Development $ 184 $ --
Inventory reserve 1,673 962
Distributor reserve 1,121 798
Other individually immaterial items 386 479
Total deferred tax assets 3,364 2,239
Valuation allowance -- --
Net deferred tax assets $3,364 $2,239
Deferred tax liabilities:
Fixed and intangible assets with $(1,563) $(1,902)
no tax basis
Depreciation (382) (101)
Total deferred tax liabilities $(1,945) $(2,003)
As of September 30, 1997, the Company had a state tax credit carry forward
of approximately $184,000, which will expire in 2002, if not utilized. The
realization of the Company's net deferred tax assets, which relate primarily to
temporary differences, is dependent on generating sufficient taxable income
during the periods in which the temporary differences are expected to reverse.
Although realization is not assured, management believes it is more likely than
not that the deferred tax assets will be realized. The amount of the net
deferred tax assets considered realizable, however, could be reduced in the near
term if future taxable income during the reversal period are reduced. Management
intends to evaluate the realizability of the net deferred tax asset each quarter
to assess the need for a valuation allowance.
The components of the Company's income (loss) before provision (benefit)
for taxes are as follows:
September 30,
1997 1996
(In thousands)
Domestic $ 1,480 $(1,453)
Foreign (1,158) (562)
Total $ (322) $(2,015)
8. Related Party Transactions
The Company purchased approximately $1,400,000, $6,800,000, and $10,372,000
of raw products manufactured at shareholders' factories in fiscal 1997, 1996 and
1995, 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 $56,000,
$278,000, and $469,000 in fiscal 1997, 1996 and 1995, respectively. The Company
has a payable to the shareholder of approximately $220,000, $220,000, and
$2,011,000 at September 30, 1997, 1996 and 1995, respectively, for commissions
and inventory purchases. The Company also had product shipments of approximately
$10,520,000, $4,898,000 and $3,377,000 to another subsidiary of the shareholder
during the years ended September 30, 1997, 1996 and 1995, respectively.
The Company purchased photo masks amounting to approximately $257,000 in
fiscal 1995 from a shareholder.
During fiscal 1996 and 1995, the Company purchased approximately $51,000
and $82,000, 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,
1997 1996 1995
(In thousands)
United States $35,107 $25,627 $32,794
Australia 1,505 1,883 --
36,612 27,510 32,794
Export:
Far East 21,064 15,073 9,700
Europe 5,015 2,105 3,695
Total $62,691 $44,688 $46,189
<PAGE>
The following table summarizes the Company's operations in different
geographic areas for 1997, 1996, and 1995:
Years Ended September 30,
1997 1996 1995
(In thousands)
Sales to unaffiliated customers
United States $59,271 $40,814 $46,189
Australia 3,420 3,874 --
Total $62,691 $44,688 $46,189
Operating income (loss)
United States $2,851 $(1,813) $6,386
Australia (2,131) (1,717) --
Total $720 $(3,530) $6,386
Identifiable Assests
United States $47,249 $35,279 $42,779
Australia 22,583 17,242 --
Total $69,832 $52,521 $42,779
In fiscal year 1997, one customer accounted for 17% of net revenues.
Additionally, one customer accounted for 12%, 19% and 16% of net revenues in
fiscal 1997, 1996 and 1995, respectively. In fiscal year 1996 two additional
customers accounted for 11% and 10% of total product revenues.
<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, 1997 and 1996, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the three years in the period ended September 30, 1997. 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, 1997 and 1996, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended September 30, 1997, 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.
/s/ Ernst & Young LLP
San Jose, California
October 22, 1997
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
Not Applicable
PART III
Item 10. Directors and Executive Officers 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 28, 1997.
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 28, 1997.
Item 13. Certain Relationships and Related Transactions
The information required for this item is incorporated by reference to
the 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 28, 1997.
<PAGE>
PART IV
Item 14.
(a) 1. Financial Statements
The financial statements required by Item 14 (a) are filed as
part of this annual report.
2. Financial Statement Schedule
Schedule II - Validation and Qualifying Accounts
Schedules not filed have been omitted because they are not
applicable, are not required or the information required to be
set forth therein is included in the financial statements or
notes thereto.
3. Exhibits
The exhibits listed in the accompanying index to exhibits are
filed or incorporated by reference as part of this annual
report.
<PAGE>
INDEX TO EXHIBITS
Exhibit Exhibit Document Description
Number
2.1 Asset Purchase Agreement dated January 2, 1996 between
Quality Semiconductor Australia Pty. Ltd. And AWA
Microelectronics Pty. Ltd. (incorporated by reference to Exhibit
2.1 of the Company's Form 8-K filed on March 4, 1996)
3.1 Amended and Restated Articles of Incorporation of the Company
(incorporated by reference to Exhibit 3.1 of the Company's
Registrant's Registration Statement on Form S-1 (File No. 33-
72884), which became effective on November 16, 1994
3.2 Bylaws of the Company, as amended.
4.1 Subscription Agreement dated January 12, 1996 between AWA
Limited and Quality Semiconductor Australia Pty. Ltd
(incorporated by reference to Exhibit 4.1 of the Company's Form
8-K filed on March 4, 1996)
4.2 Put Option dated January 12, 1996 between Quality
Semiconductor, Inc. and AWA Limited (incorporated by
reference to Exhibit 4.2 of the Company's Form 8-K filed on
March 4, 1996)
4.3 Common Stock Purchase Warrant dated February 16, 1996 issued
by Quality Semiconductor, Inc. to AWA Limited (incorporated by
reference to Exhibit 4.3 of the Company's Form 8-K filed on
March 4, 1996)
4.4 Form of QSA Convertible/redeemable Note Issuance Agreement
dated November 21, 1996, between Quality Semiconductor
Australia, Pty. Limited, Quality Semiconductor, Inc. and
Technology Associates (Note No. 1) (incorporated by reference to
Exhibit 4.1 of the Company's Form 8-K filed on December 11, 1996)
4.5 Form of QSA Convertible/redeemable Note Issuance Agreement,
dated November 21, 1996, between Quality Semiconductor
Australia Pty. Limited, Quality Semiconductor, Inc. and Win Win
Venture Capital Corporation (Note No. 3) (incorporated by
reference to Exhibit 4.2 of the Company's Form 8-K filed on
December 11, 1996)
<PAGE>
Exhibit
Number Exhibit Document Description
4.6 Form of QSA Convertible/redeemable Note Issuance Agreement,
dated November 21, 1996, between Quality Semiconductor
Australia, Pty. Limited, Quality Semiconductor, Inc. and Win Win
Venture Capital Corporation (Note No.4) (incorporated by
reference to Exhibit 4.3 of the Company's Form 8-K filed on
December 11, 1996)
4.7 Form of QSA Convertible/redeemable Note Issuance Agreement,
dated November 21, 1996, between Quality Semiconductor
Australia, Pty. Limited, Quality Semiconductor, Inc. and Win Win
Venture Capital Corporation (Note No. 5) (incorporated by reference
to Exhibit 4.4 of the Company's Form 8-K filed on
December 11, 1996)
4.8 Form of Unsecured Convertible Promissory Note of Quality
Semiconductor Australia, Pty. Limited (incorporated by reference
to Exhibit 4.5 of the Company's Form 8-K filed on December 11, 1996)
4.9 Unit Purchase Agreement (including Warrant), dated May 22, 1997
between Quality Semiconductor, Inc. and the Purchasers (incorporated
by reference to Exhibit 4.1(1) of S-3 filed on June 27, 1997)
4.13 Preferred Shares Rights Agreement, dated August 29, 1997,
between Quality Semiconductor, Inc. and BankBoston N.A.,
including the Certificate of Designation of Rights,
Preferences and Privileges of Series Participating Preferred
Stock, the Form of Rights Certificate and the Summary of
Rights attached thereto as Exhibit A, B, and C, respectively
(incorporated by reference to Exhibit 4.1 of the Company's
Form 8-K filed on September 16, 1997)
10.1 Form of Indemnification Agreement for directors and officers
(incorporated by reference to Exhibit 10.1 of the Company's
Registration Statement on Form S-1 (File No. 33-72884), which
became effective on November 16, 1994)
10.2 Amended and Restated 1989 Stock Option Plan and forms of
agreements thereunder. (Incorporated by reference to Exhibit
10.2 of the Company's Registration Statement on Form S-1 (File
No. 33-72884), which became effective on November 16, 1994).
10.3 1993 Employee Stock Option Plan and forms of agreements
thereunder (incorporated by reference to Exhibit 10.3 of the
Company's Registration Statement on Form S-1 (File No. 33-
72884), which became effective November 16, 1994)
Exhibit
Number Exhibit Document Description
10.4 1993 Directors' Stock Option Plan and forms of subscription
agreement (incorporated by reference to Exhibit 10.4 of the
Company's Registration Statement on Form S-1 (File No. 33-
72884), which became effective on November 16, 1994)
10.5 Amended and Restated 1995 Stock Option Plan and form of
agreement thereunder (incorporated by reference to Exhibit 4.3
of the Company's Form S-8 filed April 25, 1997)
10.6 Technology/Product Development & Licensee Agreement
between the Company and Seiko Instruments, Inc., dated as of
October 17, 1988. (incorporated by reference to Exhibit 10.13
of the Company's Registration Statement on Form S-1 (File
No. 33-72884), which became effective on November 16, 1994)
10.7 Technology/Product Development & License Agreement between
the Company and Yamaha Corporation, dated as of September
23, 1989. (incorporated by reference to Exhibit 10.14 of the
Company's Registration Statement on Form S-1 (File No. 33-72884),
which became effective on November 16, 1994)
10.8 Distribution Agreement between the Company and Kanematsu
Semiconductor Corporation, dated as of November 7, 1991
(incorporated by reference to Exhibit 10.15 of the Company's
registration Statement on Form S-1 (File No. 33-72884), which
became effective on November 16, 1994)
10.9 Sales Agreement between the Company and Kanematsu
Semiconductor Corporation, dated as of June 1, 1990,
(incorporated by reference to Exhibit 10.16 of the Company's
Registration Statement on Form S-1 (File No. 33-72884), which
became effective on November 16, 1994)
10.10 Lease Agreement dated December 12, 1990 between the Company
and the Prudential Insurance Company of America (incorporated
by reference to Exhibit 10.19 of the Company's Registration
Statement on Form S-1 (File No. 33-72884), which became
effective on November 16, 1994)
10.11 Master Lease Agreement dated November 1, 1993 between the
Company and Comdisco Inc., as amended. (incorporated by
reference to Exhibit 10.20 of the Company's Registration
Statement on Form S-1 (File No. 33-72884), which became
effective on November 16, 1994)
Exhibit
Number Exhibit Document Description
10.12 Guaranty and Indemnification Agreement dated January 12, 1996
among AWA Limited, Quality Semiconductor Australia Pty. Ltd.
And Quality Semiconductor, Inc. (incorporated by reference to
Exhibit 2.2 of the Company's Form 8-K filed on March 4, 1996)
10.13 Technology Services Agreement dated February 16, 1996 among
AWA Limited, AWA MicroElectronics Pty. Ltd. And Quality
Semiconductor, Australia Pty. Ltd. (incorporated by reference to
Exhibit 2.3 of the Company's Form 8-K filed on March 4, 1996)
10.14 Building Lease Agreement amended, dated July 22, 1997
between the Company and James S. Lindsay
10/15 Credit Agreement amendment, dated June 25, 1997 between the
Company and Bank of America
10.16 Change of Control Agreement, effective August 28, 1997 between
the Company and Directors
10.17 Change of Control Agreement effective August 28, 1997 between
the Company and R. Paul Gupta
10.18 Change of Control Agreement effective August 28, 1997 between
the Company and employees.
11.1 Statement regarding Computation of Earnings Per Share
12.1 Subsidiaries of the Registrant
23.1 Consent of Ernst & Young LLP, Independent Auditors
24.1 Power of Attorney included on the signature page of this Annual
Report on Form 10-K
27.1 Financial Data Schedule
Management Contracts and Compensation Plans or Agreements in which
directors and executive officers are eligible to participate.
(b) Reports on Form 8-K
The Company filed a report on Form 8-K on September 16, 197 reporting
the adoption of Preferred Shares Rights Agreement ("Poison Pill").
The Company filed a report on Form 8-K on October 23, 1997 announcing
its financial results for the fiscal year ended September 30, 1997
The Company filed a report on Form 8-K on November 11, 1997 announcing
the resignation of John Goldsberry as Vice President, Finance and Chief
Financial Officer.
The Company filed a report on Form 8-K on December 10, 1997 announcing
its first quarter of fiscal 1998 outlook.
<PAGE>
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Charged to
Costs and (1)
Beginning Expenses Deductions Ending
Balance
<S> <C> <C> <C>
Balance
Year ended September 30, 1997
Allowance for Doubtful Accounts . $123,000 $74,000 $197,000
$
-
Allowance for Sales Returns . . . . 50,000 609,000 - 659,000
------------------------------------------------------------
============================================================
$173,000 $683,000 $856,000
$
-
============================================================
Year ended September 30, 1996
Allowance for Doubtful Accounts . $123,000 $123,000
$ $
- -
Allowance for Sales Returns . . . . - - 50,000
50,000
============================================================
$123,000 $ $173,000
50,000 $
-
============================================================
Year ended September 30, 1995
Allowance for Doubtful Accounts . $144,000 $ $ 61,000 $123,000
40,000
Allowance for Sales Returns . . . . 20,000 - 20,000 -
============================================================
$164,000 $ $ 81,000 $123,000
40,000
============================================================
</TABLE>
(1) Primarily deductions represent write-offs of accounts receivable and
sales returns.
<PAGE>
Exhibit 3.2
BYLAWS
OF
QUALITY SEMICONDUCTOR, INC.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
Page
ARTICLE I - CORPORATE OFFICES
1.1 PRINCIPAL OFFICE...........................................................................28
1.2 OTHER OFFICES..............................................................................28
ARTICLE II - MEETINGS OF SHAREHOLDERS...................................................................28
2.1 PLACE OF MEETINGS..........................................................................28
2.2 ANNUAL MEETING.............................................................................28
2.3 SPECIAL MEETING............................................................................28
2.4 NOTICE OF SHAREHOLDERS' MEETINGS...........................................................29
2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE...............................................29
2.6 QUORUM.....................................................................................30
2.7 ADJOURNED MEETING; NOTICE..................................................................30
2.8 VOTING.....................................................................................30
2.9 VALIDATION OF MEETINGS; WAIVER OF NOTICE; CONSENT..........................................31
2.10 SHAREHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING...................................32
2.11 RECORD DATE FOR SHAREHOLDER NOTICE; VOTING; GIVING CONSENTS...............................32
2.12 PROXIES...................................................................................33
2.13 INSPECTORS OF ELECTION....................................................................33
ARTICLE III - DIRECTORS.................................................................................34
3.1 POWERS.....................................................................................34
3.2 NUMBER OF DIRECTORS........................................................................34
3.3 ELECTION AND TERM OF OFFICE OF DIRECTORS...................................................35
3.4 RESIGNATION AND VACANCIES..................................................................35
3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE...................................................35
3.6 REGULAR MEETINGS...........................................................................36
3.7 SPECIAL MEETINGS; NOTICE...................................................................36
3.8 QUORUM.....................................................................................36
3.9 WAIVER OF NOTICE...........................................................................36
3.10 ADJOURNMENT...............................................................................37
3.11 NOTICE OF ADJOURNMENT.....................................................................37
3.12 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING.........................................37
3.13 FEES AND COMPENSATION OF DIRECTORS........................................................37
3.14 APPROVAL OF LOANS TO OFFICERS.............................................................37
ARTICLE IV - COMMITTEES.................................................................................38
4.1 COMMITTEES OF DIRECTORS....................................................................38
4.2 MEETINGS AND ACTION OF COMMITTEES..........................................................38
ARTICLE V - OFFICERS....................................................................................39
5.1 OFFICERS...................................................................................39
5.2 ELECTION OF OFFICERS.......................................................................39
5.3 SUBORDINATE OFFICERS.......................................................................39
5.4 REMOVAL AND RESIGNATION OF OFFICERS........................................................39
5.5 VACANCIES IN OFFICES.......................................................................39
5.6 CHAIRMAN OF THE BOARD......................................................................39
5.7 PRESIDENT..................................................................................40
5.8 VICE PRESIDENTS............................................................................40
5.9 SECRETARY..................................................................................40
.10 CHIEF FINANCIAL OFFICER....................................................................40
ARTICLE VI - INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES, AND OTHER AGENTS........................41
6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS..................................................41
6.2 INDEMNIFICATION OF OTHERS..................................................................41
6.3 PAYMENT OF EXPENSES IN ADVANCE.............................................................41
6.4 INDEMNITY NOT EXCLUSIVE....................................................................42
6.5 INSURANCE INDEMNIFICATION..................................................................42
6.6 CONFLICTS..................................................................................42
ARTICLE VII - RECORDS AND REPORTS.......................................................................43
7.1 MAINTENANCE AND INSPECTION OF SHARE REGISTER...............................................43
7.2 MAINTENANCE AND INSPECTION OF BYLAWS.......................................................43
7.3 MAINTENANCE AND INSPECTION OF OTHER CORPORATE RECORDS......................................43
7.4 INSPECTION BY DIRECTORS....................................................................44
7.5 ANNUAL REPORT TO SHAREHOLDERS; WAIVER......................................................44
7.6 FINANCIAL STATEMENTS.......................................................................44
7.7 REPRESENTATION OF SHARES OF OTHER CORPORATIONS.............................................45
ARTICLE VIII - GENERAL MATTERS..........................................................................45
8.1 RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING......................................45
8.2 CHECKS; DRAFTS; EVIDENCES OF INDEBTEDNESS..................................................45
8.3 CORPORATE CONTRACTS AND INSTRUMENTS: HOW EXECUTED.........................................46
8.4 CERTIFICATES FOR SHARES....................................................................46
8.5 LOST CERTIFICATES..........................................................................47
8.6 CONSTRUCTION; DEFINITIONS..................................................................47
ARTICLE IX - AMENDMENTS.................................................................................47
9.1 AMENDMENT BY SHAREHOLDERS..................................................................47
9.2 AMENDMENT BY DIRECTORS.....................................................................47
</TABLE>
<PAGE>
BYLAWS
OF
QUALITY SEMICONDUCTOR, INC.
ARTICLE I
CORPORATE OFFICES
1.1 PRINCIPAL OFFICE
The board of directors shall fix the location of the principal
executive office of the corporation at any place within or outside the State of
California. If the principal executive office is located outside such state and
the corporation has one or more business offices in such state, then the board
of directors shall fix and designate a principal business office in the State of
California.
1.2 OTHER OFFICES
The board of directors may at any time establish branch or
subordinate offices at any place or places where the corporation is qualified to
do business.
<PAGE>
ARTICLE II
MEETINGS OF SHAREHOLDERS
2.1 PLACE OF MEETINGS
Meetings of shareholders shall be held at any place within or
outside the State of California designated by the board of directors. In the
absence of any such designation, share holders' meetings shall be held at the
principal executive office of the corporation.
2.2 ANNUAL MEETING
The annual meeting of shareholders shall be held each year on
a date and at a time designated by the board of directors. In the absence of
such designation, the annual meeting of share holders shall be held on the first
Monday of June in each year at 9:30 a.m. However, if such day falls on a legal
holiday, then the meeting shall be held at the same time and place on the next
succeeding full business day. At the meeting, directors shall be elected, and
any other proper business may be transacted.
2.3 SPECIAL MEETING
A special meeting of the shareholders may be called at any
time by the board of directors, or by the chairman of the board, or by the
president, or by one or more shareholders holding shares in the aggregate
entitled to cast not less than ten percent (10%) of the votes at that meeting.
If a special meeting is called by any person or persons other
than the board of directors or the president or the chairman of the board, then
the request shall be in writing, specifying the time of such meeting and the
general nature of the business pro posed to be transacted, and shall be
delivered personally or sent by registered mail or by telegraphic or other
facsimile transmission to the chairman of the board, the president, any vice
president or the secretary of the corporation. The officer receiving the request
shall cause notice to be promptly given to the shareholders entitled to vote, in
accordance with the pro visions of Sections 2.4 and 2.5 of these bylaws, that a
meeting will be held at the time requested by the person or persons calling the
meeting, so long as that time is not less than thirty-five (35) nor more than
sixty (60) days after the receipt of the request. If the notice is not given
within twenty (20) days after receipt of the request, then the person or per
sons requesting the meeting may give the notice. Nothing contained in this
paragraph of this Section 2.3 shall be construed as limiting, fixing or
affecting the time when a meeting of shareholders called by action of the board
of directors may be held.
2.4 NOTICE OF SHAREHOLDERS' MEETINGS
All notices of meetings of shareholders shall be sent or
otherwise given in accordance with Section 2.5 of these bylaws not less than ten
(10) (or, if sent by third-class mail pursuant to Section 2.5 of these bylaws,
thirty (30)) nor more than sixty (60) days before the date of the meeting. The
notice shall specify the place, date, and hour of the meeting and (i) in the
case of a special meeting, the general nature of the business to be transacted
(no business other than that specified in the notice may be transacted) or (ii)
in the case of the annual meeting, those matters which the board of directors,
at the time of giving the notice, intends to present for action by the
shareholders (but subject to the provisions of the next paragraph of this
Section 2.4 any proper matter may be presented at the meeting for such action).
The notice of any meeting at which directors are to be elected shall include the
name of any nominee or nominees who, at the time of the notice, the board
intends to present for election.
If action is proposed to be taken at any meeting for approval
of (i) a contract or transaction in which a director has a direct or indirect
financial interest, pursuant to Section 310 of the Corporations Code of
California (the "Code"), (ii) an amendment of the articles of incorporation,
pursuant to Section 902 of the Code, (iii) a reorganization of the corporation,
pursuant to Section 1201 of the Code, (iv) a voluntary dissolution of the
corporation, pursuant to Section 1900 of the Code, or (v) a distribution in
dissolution other than in accordance with the rights of outstanding preferred
shares, pursuant to Section 2007 of the Code, then the notice shall also state
the general nature of that proposal.
2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE
Written notice of any meeting of shareholders shall be given
either (i) personally or (ii) by first-class mail or (iii) by third-class mail
but only if the corporation has outstanding shares held of record by five
hundred (500) or more persons (determined as provided in Section 605 of the
Code) on the record date for the share holders' meeting, or (iv) by telegraphic
or other written communication. Notices not personally delivered shall be sent
charges prepaid and shall be addressed to the shareholder at the address of that
share holder appearing on the books of the corporation or given by the
shareholder to the corporation for the purpose of notice. If no such address
appears on the corporation's books or is given, notice shall be deemed to have
been given if sent to that share holder by mail or telegraphic or other written
communication to the corporation's principal executive office, or if published
at least once in a news paper of general circulation in the county where that
office is located. Notice shall be deemed to have been given at the time when
delivered personally or deposited in the mail or sent by telegram or other means
of written communication.
If any notice addressed to a shareholder at the address of
that shareholder appearing on the books of the corporation is returned to the
corporation by the United States Postal Service marked to indicate that the
United States Postal Service is unable to de liver the notice to the shareholder
at that address, then all future notices or reports shall be deemed to have been
duly given without further mailing if the same shall be available to the
shareholder on written demand of the shareholder at the principal executive
office of the corporation for a period of one (1) year from the date of the
giving of the notice.
An affidavit of the mailing or other means of giving any
notice of any shareholders' meeting, executed by the secretary, assistant
secretary or any transfer agent of the corporation giving the notice, shall be
prima facie evidence of the giving of such notice.
2.6 QUORUM
The presence in person or by proxy of the holders of a
majority of the shares entitled to vote thereat constitutes a quorum for the
transaction of business at all meetings of shareholders. The share holders
present at a duly called or held meeting at which a quorum is present may
continue to do business until adjournment, notwithstanding the withdrawal of
enough shareholders to leave less than a quorum, if any action taken (other than
adjournment) is approved by at least a majority of the shares required to
constitute a quorum.
2.7 ADJOURNED MEETING; NOTICE
Any shareholders' meeting, annual or special, whether or not a
quorum is present, may be adjourned from time to time by the vote of the
majority of the shares represented at that meeting, either in person or by
proxy. In the absence of a quorum, no other business may be transacted at that
meeting except as provided in Section 2.6 of these bylaws.
When any meeting of shareholders, either annual or special, is
adjourned to another time or place, notice need not be given of the adjourned
meeting if the time and place are announced at the meeting at which the
adjournment is taken. However, if a new record date for the adjourned meeting is
fixed or if the adjournment is for more than forty-five (45) days from the date
set for the original meeting, then notice of the adjourned meeting shall be
given. Notice of any such adjourned meeting shall be given to each share holder
of record entitled to vote at the adjourned meeting in accordance with the
provisions of Sections 2.4 and 2.5 of these bylaws. At any adjourned meeting the
corporation may transact any business which might have been transacted at the
original meeting.
2.8 VOTING
The shareholders entitled to vote at any meeting of share
holders shall be determined in accordance with the provisions of Section 2.11 of
these bylaws, subject to the provisions of Sections 702 through 704 of the Code
(relating to voting shares held by a fiduciary, in the name of a corporation or
in joint ownership).
The shareholders' vote may be by voice vote or by ballot;
provided, however, that any election for directors must be by ballot if demanded
by any shareholder at the meeting and before the voting has begun.
Except as provided in the last paragraph of this Section 2.8,
or as may be otherwise provided in the articles of incorporation, each
outstanding share, regardless of class, shall be entitled to one vote on each
matter submitted to a vote of the shareholders. Any share holder entitled to
vote on any matter may vote part of the shares in favor of the proposal and
refrain from voting the remaining shares or, except when the matter is the
election of directors, may vote them against the proposal; but, if the share
holder fails to specify the number of shares which the shareholder is voting
affirmatively, it will be conclusively presumed that the share holder's
approving vote is with respect to all shares which the shareholder is entitled
to vote.
If a quorum is present, the affirmative vote of the majority
of the shares represented and voting at a duly held meeting (which shares voting
affirmatively also constitute at least a majority of the required quorum) shall
be the act of the share holders, unless the vote of a greater number or a vote
by classes is required by the Code or by the articles of incorporation.
At a shareholders' meeting at which directors are to be
elected, a shareholder shall be entitled to cumulate votes (i.e., cast for any
candidate a number of votes greater than the number of votes which such
shareholder normally is entitled to cast) if the candidates' names have been
placed in nomination prior to commencement of the voting and the shareholder has
given notice prior to commencement of the voting of the shareholder's intention
to cumulate votes. If any shareholder has given such a notice, then every share
holder entitled to vote may cumulate votes for candidates in nomination either
(i) by giving one candidate a number of votes equal to the number of directors
to be elected multiplied by the number of votes to which that share holder's
shares are normally entitled or (ii) by distributing the shareholder's votes on
the same principle among any or all of the candidates, as the share holder
thinks fit. The candidates receiving the highest number of affirmative votes, up
to the number of directors to be elected, shall be elected; votes against any
candidate and votes withheld shall have no legal effect.
2.9 VALIDATION OF MEETINGS; WAIVER OF NOTICE; CONSENT
The transactions of any meeting of shareholders, either annual
or special, however called and noticed, and wherever held, shall be as valid as
though they had been taken at a meeting duly held after regular call and notice,
if a quorum be present either in person or by proxy, and if, either before or
after the meeting, each person entitled to vote, who was not present in person
or by proxy, signs a written waiver of notice or a consent to the holding of the
meeting or an approval of the minutes thereof. The waiver of notice or consent
or approval need not specify either the business to be transacted or the purpose
of any annual or special meeting of share holders, except that if action is
taken or proposed to be taken for approval of any of those matters specified in
the second paragraph of Section 2.4 of these bylaws, the waiver of notice or
consent or approval shall state the general nature of the proposal. All such
waivers, consents, and approvals shall be filed with the corporate records or
made a part of the minutes of the meeting.
Attendance by a person at a meeting shall also constitute a
waiver of notice of and presence at that meeting, except when the person objects
at the beginning of the meeting to the transaction of any business because the
meeting is not lawfully called or convened. Attendance at a meeting is not a
waiver of any right to object to the consideration of matters required by the
Code to be included in the notice of the meeting but not so included, if that
objection is expressly made at the meeting.
2.10 SHAREHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING
Any action which may be taken at any annual or special meeting
of shareholders may be taken without a meeting and without prior notice, if a
consent in writing, setting forth the action so taken, is signed by the holders
of outstanding shares having not less than the minimum number of votes that
would be necessary to authorize or take that action at a meeting at which all
shares entitled to vote on that action were present and voted.
In the case of election of directors, such a consent shall be
effective only if signed by the holders of all outstanding shares entitled to
vote for the election of directors. However, a director may be elected at any
time to fill any vacancy on the board of directors, provided that it was not
created by removal of a director and that it has not been filled by the
directors, by the written consent of the holders of a majority of the
outstanding shares entitled to vote for the election of directors.
All such consents shall be maintained in the corporate
records. Any shareholder giving a written consent, or the share holder's proxy
holders, or a transferee of the shares, or a personal representative of the
shareholder, or their respective proxy holders, may revoke the consent by a
writing received by the secretary of the corporation before written consents of
the number of shares required to authorize the proposed action have been filed
with the secretary.
If the consents of all shareholders entitled to vote have not
been solicited in writing and if the unanimous written consent of all such
shareholders has not been received, then the secretary shall give prompt notice
of the corporate action approved by the share holders without a meeting. Such
notice shall be given to those shareholders entitled to vote who have not
consented in writing and shall be given in the manner specified in Section 2.5
of these bylaws. In the case of approval of (i) a contract or transaction in
which a director has a direct or indirect financial interest, pursuant to
Section 310 of the Code, (ii) indemnification of a corporate "agent," pursuant
to Section 317 of the Code, (iii) a reorganization of the corporation, pursuant
to Section 1201 of the Code, and (iv) a distribution in dissolution other than
in accordance with the rights of outstanding preferred shares, pursuant to
Section 2007 of the Code, the notice shall be given at least ten (10) days
before the consummation of any action authorized by that approval.
2.11 RECORD DATE FOR SHAREHOLDER NOTICE; VOTING; GIVING CONSENTS
For purposes of determining the shareholders entitled to
notice of any meeting or to vote thereat or entitled to give consent to
corporate action without a meeting, the board of directors may fix, in advance,
a record date, which shall not be more than sixty (60) days nor less than ten
(10) days before the date of any such meeting nor more than sixty (60) days
before any such action without a meeting, and in such event only shareholders of
record on the date so fixed are entitled to notice and to vote or to give
consents, as the case may be, notwithstanding any transfer of any shares on the
books of the corporation after the record date, except as otherwise provided in
the Code.
If the board of directors does not so fix a record date:
(a) the record date for determining shareholders entitled to
notice of or to vote at a meeting of shareholders shall be
at the close of business on the business day next
preceding the day on which notice is given or, if notice
is waived, at the close of business on the business day
next preceding the day on which the meeting is held; and
(b) the record date for determining shareholders entitled to
give consent to corporate action in writing without a
meeting, (i) when no prior action by the board has been
taken, shall be the day on which the first written consent
is given, or (ii) when prior action by the board has been
taken, shall be at the close of business on the day on
which the board adopts the resolution relating to that
action, or the sixtieth (60th) day before the date of such
other action, whichever is later.
The record date for any other purpose shall be as provided in
Article VIII of these bylaws.
2.12 PROXIES
Every person entitled to vote for directors, or on any other
matter, shall have the right to do so either in person or by one or more agents
authorized by a written proxy signed by the person and filed with the secretary
of the corporation. A proxy shall be deemed signed if the shareholder's name is
placed on the proxy (whether by manual signature, typewriting, telegraphic
transmission or otherwise) by the shareholder or the shareholder's
attorney-in-fact. A validly executed proxy which does not state that it is
irrevocable shall continue in full force and effect unless (i) the person who
executed the proxy revokes it prior to the time of voting by delivering a
writing to the corporation stating that the proxy is revoked or by executing a
subsequent proxy and presenting it to the meeting or by voting in person at the
meeting, or (ii) written notice of the death or incapacity of the maker of that
proxy is received by the corporation before the vote pursuant to that proxy is
counted; provided, however, that no proxy shall be valid after the expiration of
eleven (11) months from the date of the proxy, unless otherwise provided in the
proxy. The dates contained on the forms of proxy presumptively determine the
order of execution, regardless of the postmark dates on the envelopes in which
they are mailed. The revocability of a proxy that states on its face that it is
irrevocable shall be governed by the pro visions of Sections 705(e) and 705(f)
of the Code.
2.13 INSPECTORS OF ELECTION
Before any meeting of shareholders, the board of directors may
appoint an inspector or inspectors of election to act at the meeting or its
adjournment. If no inspector of election is so appointed, then the chairman of
the meeting may, and on the request of any share holder or a shareholder's proxy
shall, appoint an inspector or inspectors of election to act at the meeting. The
number of inspectors shall be either one (1) or three (3). If inspectors are
appointed at a meeting pursuant to the request of one (1) or more shareholders
or proxies, then the holders of a majority of shares or their proxies present at
the meeting shall determine whether one (1) or three (3) inspectors are to be
appointed. If any person appointed as inspector fails to appear or fails or
refuses to act, then the chairman of the meeting may, and upon the request of
any share holder or a share holder's proxy shall, appoint a person to fill that
vacancy.
Such inspectors shall:
(a) determine the number of shares outstanding and the voting
power of each, the number of shares represented at the
meeting, the existence of a quorum, and the authenticity,
validity, and effect of proxies;
(b) receive votes, ballots or consents;
(c) hear and determine all challenges and questions in any
way arising in connection with the right to vote;
(d) count and tabulate all votes or consents;
(e) determine when the polls shall close;
(f) determine the result; and
(g) do any other acts that may be proper to conduct the
election or vote with fairness to all shareholders.
<PAGE>
ARTICLE III
3.1 DIRECTORS POWERS
Subject to the provisions of the Code and any limitations in
the articles of incorporation and these bylaws relating to action required to be
approved by the shareholders or by the outstanding shares, the business and
affairs of the corporation shall be managed and all corporate powers shall be
exercised by or under the direction of the board of directors.
3.2 NUMBER OF DIRECTORS
The number of directors of the corporation shall be not less
than three (3) nor more than five (5). The exact number of directors shall be
five (5)* until changed, within the limits specified above, by a bylaw amending
this Section 3.2, duly adopted by the board of directors or by the shareholders.
The indefinite number of directors may be changed, or a definite number may be
fixed without provision for an indefinite number, by a duly adopted amendment to
the articles of incorporation or by an amendment to this bylaw duly adopted by
the vote or written consent of holders of a majority of the outstanding shares
entitled to vote; provided, however, that an amendment reducing the fixed number
or the minimum number of directors to a number less than five (5) can not be
adopted if the votes cast against its adoption at a meeting, or the shares not
consenting in the case of an action by written consent, are equal to more than
sixteen and two-thirds percent (16-2/3%) of the outstanding shares entitled to
vote thereon. No amendment may change the stated maximum number of authorized
directors to a number greater than two (2) times the stated minimum number of
directors minus one (1).
No reduction of the authorized number of directors shall have
the effect of removing any director before that director's term of office
expires.
3.3 ELECTION AND TERM OF OFFICE OF DIRECTORS
Directors shall be elected at each annual meeting of
shareholders to hold office until the next annual meeting. Each director,
including a director elected to fill a vacancy, shall hold office until the
expiration of the term for which elected and until a successor has been elected
and qualified.
3.4 RESIGNATION AND VACANCIES
Any director may resign effective on giving written notice to
the chairman of the board, the president, the secretary or the board of
directors, unless the notice specifies a later time for that resignation to
become effective. If the resignation of a director is effective at a future
time, the board of directors may elect a successor to take office when the
resignation becomes effective.
Vacancies in the board of directors may be filled by a
majority of the remaining directors, even if less than a quorum, or by a sole
remaining director; however, a vacancy created by the removal of a director by
the vote or written consent of the shareholders or by court order may be filled
only by the affirmative vote of a majority of the shares represented and voting
at a duly held meeting at which a quorum is present (which shares voting
affirmatively also constitute a majority of the required quorum), or by the
unanimous written consent of all shares entitled to vote thereon. Each director
so elected shall hold office until the next annual meeting of the shareholders
and until a successor has been elected and qualified.
A vacancy or vacancies in the board of directors shall be
deemed to exist (i) in the event of the death, resignation or removal of any
director, (ii) if the board of directors by resolution declares vacant the
office of a director who has been declared of unsound mind by an order of court
or convicted of a felony, (iii) if the authorized number of directors is
increased, or (iv) if the share holders fail, at any meeting of shareholders at
which any director or directors are elected, to elect the number of directors to
be elected at that meeting.
The shareholders may elect a director or directors at any time
to fill any vacancy or vacancies not filled by the directors, but any such
election other than to fill a vacancy created by removal, if by written consent,
shall require the consent of the holders of a majority of the outstanding shares
entitled to vote thereon.
3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE
Regular meetings of the board of directors may be held at any
place within or outside the State of California that has been designated from
time to time by resolution of the board. In the absence of such a designation,
regular meetings shall be held at the principal executive office of the
corporation. Special meetings of the board may be held at any place within or
outside the State of California that has been designated in the notice of the
meeting or, if not stated in the notice or if there is no notice, at the
principal executive office of the corporation.
Any meeting, regular or special, may be held by conference
telephone or similar communication equipment, so long as all directors
participating in the meeting can hear one another; and all such directors shall
be deemed to be present in person at the meeting.
3.6 REGULAR MEETINGS
Regular meetings of the board of directors may be held without
notice if the times of such meetings are fixed by the board of directors.
3.7 SPECIAL MEETINGS; NOTICE
Special meetings of the board of directors for any purpose or
purposes may be called at any time by the chairman of the board, the president,
any vice president, the secretary or any two directors.
Notice of the time and place of special meetings shall be
delivered personally or by telephone to each director or sent by first-class
mail or telegram, charges prepaid, addressed to each director at that director's
address as it is shown on the records of the corporation. If the notice is
mailed, it shall be deposited in the United States mail at least four (4) days
before the time of the holding of the meeting. If the notice is delivered
personally or by telephone or telegram, it shall be delivered personally or by
telephone or to the telegraph company at least forty-eight (48) hours before the
time of the holding of the meeting. Any oral notice given personally or by
telephone may be communicated either to the director or to a person at the
office of the director who the person giving the notice has reason to believe
will promptly communicate it to the director. The notice need not specify the
purpose or the place of the meeting, if the meeting is to be held at the
principal executive office of the corporation.
3.8 QUORUM
A majority of the authorized number of directors shall
constitute a quorum for the transaction of business, except to adjourn as
provided in Section 3.10 of these bylaws. Every act or decision done or made by
a majority of the directors present at a duly held meeting at which a quorum is
present shall be regarded as the act of the board of directors, subject to the
provisions of Section 310 of the Code (as to approval of contracts or
transactions in which a director has a direct or indirect material financial
interest), Section 311 of the Code (as to appointment of committees), Section
317(e) of the Code (as to indemnification of directors), the articles of
incorporation, and other applicable law.
A meeting at which a quorum is initially present may continue
to transact business notwithstanding the withdrawal of directors, if any action
taken is approved by at least a majority of the required quorum for that
meeting.
3.9 WAIVER OF NOTICE
Notice of a meeting need not be given to any director (i) who
signs a waiver of notice or a consent to holding the meeting or an approval of
the minutes thereof, whether before or after the meeting, or (ii) who attends
the meeting without protesting, prior thereto or at its commencement, the lack
of notice to such directors. All such waivers, consents, and approvals shall be
filed with the corporate records or made part of the minutes of the meeting. A
waiver of notice need not specify the purpose of any regular or special meeting
of the board of directors.
3.10 ADJOURNMENT
A majority of the directors present, whether or not
constituting a quorum, may adjourn any meeting to another time and place.
3.11 NOTICE OF ADJOURNMENT
Notice of the time and place of holding an adjourned meeting
need not be given unless the meeting is adjourned for more than twenty-four (24)
hours. If the meeting is adjourned for more than twenty-four (24) hours, then
notice of the time and place of the adjourned meeting shall be given before the
adjourned meeting takes place, in the manner specified in Section 3.7 of these
bylaws, to the directors who were not present at the time of the adjournment.
3.12 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING
Any action required or permitted to be taken by the board of
directors may be taken without a meeting, provided that all members of the board
individually or collectively consent in writing to that action. Such action by
written consent shall have the same force and effect as a unanimous vote of the
board of directors. Such written consent and any counterparts thereof shall be
filed with the minutes of the proceedings of the board.
3.13 FEES AND COMPENSATION OF DIRECTORS
Directors and members of committees may receive such
compensation, if any, for their services and such reimbursement of expenses as
may be fixed or determined by resolution of the board of directors. This Section
3.13 shall not be construed to preclude any director from serving the
corporation in any other capacity as an officer, agent, employee or otherwise
and receiving compensation for those services.
3.14 ASPPROVAL OF LOANS TO OFFICERS
The corporation may, upon the approval of the board of
directors alone, make loans of money or property to, or guarantee the
obligations of, any officer of the corporation or its parent or subsidiary,
whether or not a director, or adopt an employee benefit plan or plans
authorizing such loans or guaranties provided that (i) the board of directors
determines that such a loan or guaranty or plan may reasonably be expected to
benefit the corporation, (ii) the corporation has outstanding shares held of
record by 100 or more persons (determined as provided in Section 605 of the
Code) on the date of approval by the board of directors, and (iii) the approval
of the board of directors is by a vote sufficient without counting the vote of
any interested director or directors.
<PAGE>
ARTICLE IV
COMMITTEES
4.1 COMMITTEES OF DIRECTORS
The board of directors may, by resolution adopted by a
majority of the authorized number of directors, designate one (1) or more
committees, each consisting of two or more directors, to serve at the pleasure
of the board. The board may designate one (1) or more directors as alternate
members of any committee, who may replace any absent member at any meeting of
the committee. The appointment of members or alternate members of a committee
requires the vote of a majority of the authorized number of directors. Any
committee, to the extent provided in the resolution of the board, shall have all
the authority of the board, except with respect to:
(a) the approval of any action which, under the Code, also requires
shareholders' approval or approval of the outstanding shares;
(b) the filling of vacancies on the board of directors or in any committee;
(c) the fixing of compensation of the directors for serving on the board or any
committee; (d) the amendment or repeal of these bylaws or the adoption of new
bylaws; (e) the amendment or repeal of any resolution of the board of directors
which by its express terms is not so amendable or repealable;
(f) a distribution to the shareholders of the corporation, except at a rate
or in a periodic amount or within a price range determined by the board of
directors; or
(g) the appointment of any other committees of the board of directors or
the members of such committees.
4.2 MEETINGS AND ACTION OF COMMITTEES
Meetings and actions of committees shall be governed by, and held and taken
in accordance with, the provisions of Article III of these bylaws, Section 3.5
(place of meetings), Section 3.6 (regular meetings), Section 3.7 (special
meetings and notice), Section 3.8 (quorum), Section 3.9 (waiver of notice),
Section 3.10 (adjournment), Section 3.11 (notice of adjournment), and Section
3.12 (action without meeting), with such changes in the context of those bylaws
as are necessary to substitute the commit tee and its members for the board of
directors and its members; provided, however, that the time of regular meetings
of committees may be determined either by resolution of the board of directors
or by resolution of the committee, that special meetings of committees may also
be called by resolution of the board of directors, and that notice of special
meetings of committees shall also be given to all alternate members, who shall
have the right to attend all meetings of the committee. The board of directors
may adopt rules for the government of any committee not inconsistent with the
provisions of these bylaws.
<PAGE>
ARTICLE V
OFFICERS
5.1 OFFICERS
The officers of the corporation shall be a president, a
secretary, and a chief financial officer. The corporation may also have, at the
discretion of the board of directors, a chairman of the board, one or more vice
presidents, one or more assistant secretaries, one or more assistant treasurers,
and such other officers as may be appointed in accordance with the provisions of
Section 5.3 of these bylaws. Any number of offices may be held by the same
person.
5.2 ELECTION OF OFFICERS
The officers of the corporation, except such officers as may
be appointed in accordance with the provisions of Section 5.3 or Section 5.5 of
these bylaws, shall be chosen by the board, subject to the rights, if any, of an
officer under any contract of employment.
5.3 SUBORDINATE OFFICERS
The board of directors may appoint, or may empower the
president to appoint, such other officers as the business of the corporation may
require, each of whom shall hold office for such period, have such authority,
and perform such duties as are provided in these bylaws or as the board of
directors may from time to time determine.
5.4 REMOVAL AND RESIGNATION OF OFFICERS
Subject to the rights, if any, of an officer under any
contract of employment, any officer may be removed, either with or without
cause, by the board of directors at any regular or special meeting of the board
or, except in case of an officer chosen by the board of directors, by any
officer upon whom such power of removal may be conferred by the board of
directors.
Any officer may resign at any time by giving written notice to
the corporation. Any resignation shall take effect at the date of the receipt of
that notice or at any later time specified in that notice; and, unless otherwise
specified in that notice, the acceptance of the resignation shall not be
necessary to make it effective. Any resignation is without prejudice to the
rights, if any, of the corporation under any contract to which the officer is a
party.
5.5 VACANCIES IN OFFICES
A vacancy in any office because of death, resignation,
removal, disqualification or any other cause shall be filled in the manner
prescribed in these bylaws for regular appointments to that office.
5.6 CHAIRMAN OF THE BOARD
The chairman of the board, if such an officer be elected,
shall, if present, preside at meetings of the board of directors and exercise
and perform such other powers and duties as may from time to time be assigned to
him by the board of directors or as may be pre scribed by these bylaws. If there
is no president, then the chairman of the board shall also be the chief
executive officer of the corporation and shall have the powers and duties
prescribed in Section 5.7 of these bylaws.
5.7 PRESIDENT
Subject to such supervisory powers, if any, as may be given by
the board of directors to the chairman of the board, if there be such an
officer, the president shall be the chief executive officer of the corporation
and shall, subject to the control of the board of directors, have general
supervision, direction, and control of the business and the officers of the
corporation. He shall preside at all meetings of the shareholders and, in the
absence or non existence of a chairman of the board, at all meetings of the
board of directors. He shall have the general powers and duties of management
usually vested in the office of president of a corporation, and shall have such
other powers and duties as may be prescribed by the board of directors or these
bylaws.
5.8 VICE PRESIDENTS
In the absence or disability of the president, the vice
presidents, if any, in order of their rank as fixed by the board of directors
or, if not ranked, a vice president designated by the board of directors, shall
perform all the duties of the president and when so acting shall have all the
powers of, and be subject to all the restrictions upon, the president. The vice
presidents shall have such other powers and perform such other duties as from
time to time may be prescribed for them respectively by the board of directors,
these bylaws, the president or the chairman of the board.
5.9 SECRETARY
The secretary shall keep or cause to be kept, at the principal
executive office of the corporation or such other place as the board of
directors may direct, a book of minutes of all meetings and actions of
directors, committees of directors and shareholders. The minutes shall show the
time and place of each meeting, whether regular or special (and, if special, how
authorized and the notice given), the names of those present at directors'
meetings or committee meetings, the number of shares present or represented at
shareholders' meetings, and the proceedings thereof.
The secretary shall keep, or cause to be kept, at the
principal executive office of the corporation or at the office of the
corporation's transfer agent or registrar, as determined by resolution of the
board of directors, a share register, or a duplicate share register, showing the
names of all shareholders and their addresses, the number and classes of shares
held by each, the number and date of certificates evidencing such shares, and
the number and date of cancellation of every certificate surrendered for
cancellation.
The secretary shall give, or cause to be given, notice of all
meetings of the shareholders and of the board of directors required to be given
by law or by these bylaws. He shall keep the seal of the corporation, if one be
adopted, in safe custody and shall have such other powers and perform such other
duties as may be prescribed by the board of directors or by these bylaws.
5.10.....CHIEF FINANCIAL OFFICER
The chief financial officer shall keep and maintain, or cause
to be kept and maintained, adequate and correct books and records of accounts of
the properties and business transactions of the corporation, including accounts
of its assets, liabilities, receipts, disbursements, gains, losses, capital,
retained earnings, and shares. The books of account shall at all reasonable
times be open to inspection by any director.
The chief financial officer shall deposit all money and other
valuables in the name and to the credit of the corporation with such
depositaries as may be designated by the board of directors. He shall disburse
the funds of the corporation as may be ordered by the board of directors, shall
render to the president and directors, whenever they request it, an account of
all of his transactions as chief financial officer and of the financial
condition of the corporation, and shall have such other powers and perform such
other duties as may be prescribed by the board of directors or these bylaws.
<PAGE>
ARTICLE VI
INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES, AND OTHER AGENT
6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS
The corporation shall, to the maximum extent and in the manner
permitted by the Code, indemnify each of its directors and officers against
expenses (as defined in Section 317(a) of the Code), judgments, fines,
settlements, and other amounts actually and reason ably incurred in connection
with any proceeding (as defined in Section 317(a) of the Code), arising by
reason of the fact that such person is or was an agent of the corporation. For
purposes of this Article VI, a "director" or "officer" of the corporation
includes any person (i) who is or was a director or officer of the corporation,
(ii) who is or was serving at the request of the corporation as a director or
officer of another corporation, partnership, joint venture, trust or other
enterprise, or (iii) who was a director or officer of a corporation which was a
predecessor corporation of the corporation or of another enterprise at the
request of such predecessor corporation.
6.2 INDEMNIFICATION OF OTHERS
The corporation shall have the power, to the extent and in the
manner permitted by the Code, to indemnify each of its employees and agents
(other than directors and officers) against expenses (as defined in Section
317(a) of the Code), judgments, fines, settlements, and other amounts actually
and reason ably incurred in connection with any proceeding (as defined in
Section 317(a) of the Code), arising by reason of the fact that such person is
or was an agent of the corporation. For purposes of this Article VI, an
"employee" or "agent" of the corporation (other than a director or officer)
includes any person (i) who is or was an employee or agent of the corporation,
(ii) who is or was serving at the request of the corporation as an employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise, or (iii) who was an employee or agent of a corporation which was a
predecessor corporation of the corporation or of another enterprise at the
request of such predecessor corporation.
6.3 PAYMENT OF EXPENSES IN ADVANCE
Expenses incurred in defending any civil or criminal action or
proceeding for which indemnification is required pursuant to Section 6.1 or for
which indemnification is permitted pursuant to Section 6.2 following
authorization thereof by the Board of Directors shall be paid by the corporation
in advance of the final disposition of such action or proceeding upon receipt of
an under taking by or on behalf of the indemnified party to repay such amount if
it shall ultimately be determined that the indemnified party is not entitled to
be indemnified as authorized in this Article VI.
6.4 INDEMNITY NOT EXCLUSIVE
The indemnification provided by this Article VI shall not be
deemed exclusive of any other rights to which those seeking indemnification may
be entitled under any bylaw, agreement, vote of shareholders or disinterested
directors or otherwise, both as to action in an official capacity and as to
action in another capacity while holding such office, to the extent that such
additional rights to indemnification are authorized in the Articles of
Incorporation.
6.5 INSURANCE INDEMNIFICATION
The corporation shall have the power to purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee or
agent of the corporation against any liability asserted against or incurred by
such person in such capacity or arising out of such person's status as such,
whether or not the corporation would have the power to indemnify him against
such liability under the provisions of this Article VI.
6.6 CONFLICTS
No indemnification or advance shall be made under this Article
VI, except where such indemnification or advance is man dated by law or the
order, judgment or decree of any court of competent jurisdiction, in any
circumstance where it appears:
(1) That it would be inconsistent with a provision of the
Articles of Incorporation, these bylaws, a resolution of
the shareholders or an agreement in effect at the time of
the accrual of the alleged cause of the action asserted in
the proceeding in which the expenses were incurred or
other amounts were paid, which prohibits or otherwise
limits indemnification; or
(2) That it would be inconsistent with any condition expressly
imposed by a court in approving a settlement.
<PAGE>
ARTICLE VII
RECORDS AND REPORTS
7.1 MAINTENANCE AND INSPECTION OF SHARE REGISTER
The corporation shall keep either at its principal executive
office or at the office of its transfer agent or registrar (if either be
appointed), as determined by resolution of the board of directors, a record of
its shareholders listing the names and addresses of all shareholders and the
number and class of shares held by each share holder.
A shareholder or shareholders of the corporation who holds at
least five percent (5%) in the aggregate of the outstanding voting shares of the
corporation or who holds at least one percent (1%) of such voting shares and has
filed a Schedule 14B with the Securities and Exchange Commission relating to the
election of directors, may (i) inspect and copy the records of share holders'
names, addresses, and shareholdings during usual business hours on five (5)
days' prior written demand on the corporation, (ii) obtain from the transfer
agent of the corporation, on written demand and on the tender of such transfer
agent's usual charges for such list, a list of the names and addresses of the
shareholders who are entitled to vote for the election of directors, and their
shareholdings, as of the most recent record date for which that list has been
compiled or as of a date specified by the shareholder after the date of demand.
Such list shall be made available to any such shareholder by the transfer agent
on or before the later of five (5) days after the demand is received or five (5)
days after the date specified in the demand as the date as of which the list is
to be compiled.
The record of shareholders shall also be open to inspection on
the written demand of any shareholder or holder of a voting trust certificate,
at any time during usual business hours, for a purpose reasonably related to the
holder's interests as a share holder or as the holder of a voting trust
certificate.
Any inspection and copying under this Section 7.1 may be made
in person or by an agent or attorney of the shareholder or holder of a voting
trust certificate making the demand.
7.2 MAINTENANCE AND INSPECTION OF BYLAWS
The corporation shall keep at its principal executive office
or, if its principal executive office is not in the State of California, at its
principal business office in California the original or a copy of these bylaws
as amended to date, which bylaws shall be open to inspection by the shareholders
at all reason able times during office hours. If the principal executive office
of the corporation is outside the State of California and the corporation has no
principal business office in such state, then the secretary shall, upon the
written request of any shareholder, furnish to that share holder a copy of these
bylaws as amended to date.
7.3 MAINTENANCE AND INSPECTION OF OTHER CORPORATE RECORDS
The accounting books and records and the minutes of
proceedings of the shareholders, of the board of directors, and of any commit
tee or committees of the board of directors shall be kept at such place or
places as are designated by the board of directors or, in absence of such
designation, at the principal executive office of the corporation. The minutes
shall be kept in written form, and the accounting books and records shall be
kept either in written form or in any other form capable of being converted into
written form.
The minutes and accounting books and records shall be open to
inspection upon the written demand of any shareholder or holder of a voting
trust certificate, at any reasonable time during usual business hours, for a
purpose reasonably related to the holder's interests as a shareholder or as the
holder of a voting trust certificate. The inspection may be made in person or by
an agent or attorney and shall include the right to copy and make extracts. Such
rights of inspection shall extend to the records of each subsidiary corporation
of the corporation.
7.4 INSPECTION BY DIRECTORS
Every director shall have the absolute right at any reasonable
time to inspect all books, records, and documents of every kind as well as the
physical properties of the corporation and each of its subsidiary corporations.
Such inspection by a director may be made in person or by an agent or attorney.
The right of inspection includes the right to copy and make extracts of
documents.
7.5 ANNUAL REPORT TO SHAREHOLDERS; WAIVER
The board of directors shall cause an annual report to be sent
to the shareholders not later than one hundred twenty (120) days after the close
of the fiscal year adopted by the corporation. Such report shall be sent at
least fifteen (15) days (or, if sent by third-class mail, thirty-five (35) days)
before the annual meeting of shareholders to be held during the next fiscal year
and in the manner specified in Section 2.5 of these bylaws for giving notice to
shareholders of the corporation.
The annual report shall contain (i) a balance sheet as of the
end of the fiscal year, (ii) an income statement, (iii) a statement of changes
in financial position for the fiscal year, and (iv) any report of independent
accountants or, if there is no such report, the certificate of an authorized
officer of the corporation that the statements were prepared without audit from
the books and records of the corporation.
The foregoing requirement of an annual report shall be waived
so long as the shares of the corporation are held by fewer than one hundred
(100) holders of record.
7.6 FINANCIAL STATEMENTS
If no annual report for the fiscal year has been sent to share
holders, then the corporation shall, upon the written request of any shareholder
made more than one hundred twenty (120) days after the close of such fiscal
year, deliver or mail to the person making the request, within thirty (30) days
thereafter, a copy of a balance sheet as of the end of such fiscal year and an
income statement and statement of changes in financial position for such fiscal
year.
If a shareholder or shareholders holding at least five percent
(5%) of the outstanding shares of any class of stock of the corporation makes a
written request to the corporation for an income statement of the corporation
for the three-month, six-month or nine-month period of the then current fiscal
year ended more than thirty (30) days before the date of the request, and for a
balance sheet of the corporation as of the end of that period, then the chief
financial officer shall cause that statement to be prepared, if not already
prepared, and shall deliver personally or mail that statement or statements to
the person making the request within thirty (30) days after the receipt of the
request. If the corporation has not sent to the shareholders its annual report
for the last fiscal year, the statements referred to in the first paragraph of
this Section 7.6 shall likewise be delivered or mailed to the shareholder or
shareholders within thirty (30) days after the request.
The quarterly income statements and balance sheets referred to
in this section shall be accompanied by the report, if any, of any independent
accountants engaged by the corporation or by the certificate of an authorized
officer of the corporation that the financial statements were prepared without
audit from the books and records of the corporation.
7.7 REPRESENTATION OF SHARES OF OTHER CORPORATIONS
The chairman of the board, the president, any vice president,
the chief financial officer, the secretary or assistant secretary of this
corporation, or any other person authorized by the board of directors or the
president or a vice president, is authorized to vote, represent, and exercise on
behalf of this corporation all rights incident to any and all shares of any
other corporation or corporations standing in the name of this corporation. The
authority herein granted may be exercised either by such person directly or by
any other person authorized to do so by proxy or power of attorney duly executed
by such person having the authority.
<PAGE>
ARTICLE VIII
GENERAL MATTERS
8.1 RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING
For purposes of determining the shareholders entitled to
receive payment of any dividend or other distribution or allotment of any rights
or the shareholders entitled to exercise any rights in respect of any other
lawful action (other than action by share holders by written consent without a
meeting), the board of directors may fix, in advance, a record date, which shall
not be more than sixty (60) days before any such action. In that case, only
share holders of record at the close of business on the date so fixed are
entitled to receive the dividend, distribution or allotment of rights, or to
exercise such rights, as the case may be, notwithstanding any transfer of any
shares on the books of the corporation after the record date so fixed, except as
otherwise provided in the Code.
If the board of directors does not so fix a record date, then
the record date for determining shareholders for any such purpose shall be at
the close of business on the day on which the board adopts the applicable
resolution or the sixtieth (60th) day before the date of that action, whichever
is later.
8.2 CHECKS; DRAFTS; EVIDENCES OF INDEBTEDNESS
From time to time, the board of directors shall determine by
resolution which person or persons may sign or endorse all checks, drafts, other
orders for payment of money, notes or other evidences of indebtedness that are
issued in the name of or payable to the corporation, and only the persons so
authorized shall sign or endorse those instruments.
8.3 CORPORATE CONTRACTS AND INSTRUMENTS: HOW EXECUTED
The board of directors, except as otherwise provided in these
bylaws, may authorize any officer or officers, or agent or agents, to enter into
any contract or execute any instrument in the name of and on behalf of the
corporation; such authority may be general or confined to specific instances.
Unless so authorized or ratified by the board of directors or within the agency
power of an officer, no officer, agent or employee shall have any power or
authority to bind the corporation by any contract or engagement or to pledge its
credit or to render it liable for any purpose or for any amount.
8.4 CERTIFICATES FOR SHARES
A certificate or certificates for shares of the corporation
shall be issued to each shareholder when any of such shares are fully paid. The
board of directors may authorize the issuance of certificates for shares partly
paid provided that these certificates shall state the total amount of the
consideration to be paid for them and the amount actually paid. All certificates
shall be signed in the name of the corporation by the chairman of the board or
the vice chairman of the board or the president or a vice president and by the
chief financial officer or an assistant treasurer or the secretary or an
assistant secretary, certifying the number of shares and the class or series of
shares owned by the shareholder. Any or all of the signatures on the certificate
may be facsimile.
In case any officer, transfer agent or registrar who has
signed or whose facsimile signature has been placed on a certificate ceases to
be that officer, transfer agent or registrar before that certificate is issued,
it may be issued by the corporation with the same effect as if that person were
an officer, transfer agent or registrar at the date of issue.
8.5 LOST CERTIFICATES
Except as provided in this Section 8.5, no new certificates
for shares shall be issued to replace a previously issued certificate unless the
latter is surrendered to the corporation and canceled at the same time. The
board of directors may, in case any share certificate or certificate for any
other security is lost, stolen or destroyed, authorize the issuance of
replacement certificates on such terms and conditions as the board may require;
the board may require indemnification of the corporation secured by a bond or
other adequate security sufficient to protect the corporation against any claim
that may be made against it, including any expense or liability, on account of
the alleged loss, theft or destruction of the certificate or the issuance of the
replacement certificate.
8.6 CONSTRUCTION; DEFINITIONS
Unless the context requires otherwise, the general provisions,
rules of construction, and definitions in the Code shall govern the construction
of these bylaws. Without limiting the generality of this provision, the singular
number includes the plural, the plural number includes the singular, and the
term "person" includes both a corporation and a natural person.
<PAGE>
ARTICLE IX
AMENDMENTS
9.1 AMENDMENT BY SHAREHOLDERS
New bylaws may be adopted or these bylaws may be amended or
repealed by the vote or written consent of holders of a majority of the
outstanding shares entitled to vote; provided, however, that if the articles of
incorporation of the corporation set forth the number of authorized directors of
the corporation, then the authorized number of directors may be changed only by
an amendment of the articles of incorporation.
9.2 AMENDMENT BY DIRECTORS
Subject to the rights of the shareholders as provided in
Section 9.1 of these bylaws, bylaws, other than a bylaw or an amendment of a
bylaw changing the authorized number of directors (except to fix the authorized
number of directors pursuant to a bylaw providing for a variable number of
directors), may be adopted, amended or repealed by the board of directors.
<PAGE>
CERTIFICATE OF ADOPTION OF BYLAWS
OF
QUALITY SEMICONDUCTOR, INC.
Adoption by Incorporator
The undersigned person appointed in the Articles of Incorporation to
act as the Incorporator of QUALITY SEMICONDUCTOR, INC. hereby adopts the
foregoing bylaws, comprising twenty-two (22) pages, as the Bylaws of the
corporation.
Executed this 21st day of October 1988.
/s/ Steven J. Hanley
Steven J. Hanley, Incorporated
Certificate by Secretary
of Adoption by Incorporator
The undersigned hereby certifies that he is the duly elected,
qualified, and acting Secretary of QUALITY SEMICONDUCTOR, INC. and that the
foregoing Bylaws, comprising twenty-two (22) pages, were adopted as the Bylaws
of the corporation on October 21, 1988, by the person appointed in the Articles
of Incorporation to act as the Incorporator of the corporation.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand and
affixed the corporate seal this 21st day of October 1988.
/s/ Craig W. Johnson
Craig W. Johnson, Secretary
<PAGE>
Exhibit 10.2a
PROSPECTUS
QUALITY SEMICONDUCTOR, INC.
1989 STOCK OPTION PLAN
This Prospectus relates to 1,221,910 shares of Common Stock of Quality
Semiconductor, Inc. (the "Company") which are offered for sale upon exercise of
options to purchase shares of Common Stock granted or to be granted under the
Company's 1989 Stock Option Plan. The terms and conditions of grants under the
Plan, including the price of the shares of Common Stock, are governed by the
provisions of such plan and the agreements thereunder between the Company and
each participant.
THIS DOCUMENT CONSTITUTES PART
OF A PROSPECTUS COVERING SECURITIES
THAT HAVE BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933.
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. PROSPECTIVE
INVESTORS SHOULD CONSIDER CAREFULLY THE MATTERS SET FORTH UNDER "RISK FACTORS."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
TABLE OF CONTENTS
Page
INTRODUCTION................................................................2
RISK FACTORS ...............................................................2
THE 1989 STOCK OPTION PLAN .................................................2
RESTRICTIONS ON RESALE......................................................8
INCORPORATION OF DOCUMENTS BY REFERENCE.....................................9
The date of this Prospectus is February 13, 1995.
<PAGE>
QUALITY SEMICONDUCTOR INC.
1989 STOCK OPTION PLAN
INTRODUCTION
This Prospectus relates to 1,221,910 shares of Common Stock ("Common Stock") of
Quality Semiconductor, Inc. (the "Company") issuable upon exercise of options
granted or to be granted to optionees under the Company's 1989 Stock Option Plan
(the "Plan"). This Prospectus sets forth information concerning the Plan and
will be distributed to participating optionees pursuant to the Securities Act of
1933 (the "Securities Act").
Additional information about the Plan and its administration can be obtained by
writing the Stock Administrator of the Company at its executive offices at 851
Martin Avenue, Santa Clara, California 95050 or calling the Stock Administrator
at (408) 450-8000.
RISK FACTORS
For a discussion of certain factors that should be considered carefully in
evaluating the Company and its business before purchasing the shares offered by
this Prospectus, reference is made to the sections entitled "Risk Factors,"
"Business," and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" contained in the Company's Prospectus (the "Company's
Prospectus") filed on November 18, 1994 with the U.S. Securities and Exchange
Commission (the "SEC") pursuant to Rule 424(b)(4) of the Securities Act of 1933,
as amended.
More recent information than that contained in the Company's Prospectus will be
available at such time as the Company files with the SEC its Annual Report on
Form 10-K (the "Annual Report") for 1995 and future years. Readers of this
Prospectus should refer to Item 1, entitled "Business," which will be contained
in the Annual Report. Readers should also refer to the section entitled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" that will be contained in the Company's Annual Report to
Shareholders for 1995 and future years and which will be included in the Annual
Report. In addition, readers should refer to Item 2, entitled "Management's
Discussion and Analysis of Financial Condition and Results of Operations," that
will be contained in the Company's Quarterly Reports on Form 10-Q, to be filed
with the SEC at certain dates.
Copies of each of the documents described above are available (or will be
available) without charge from the Company through its Stock Administrator.
THE 1989 STOCK OPTION PLAN
General
The Plan was adopted by the Board of Directors in November 1989 and approved by
the shareholders in December 1989. A total of 1,316,666 shares of Common Stock
have been reserved for issuance under the Plan As of the date of this
Prospectus, options to purchase 884,683 shares of Common Stock are outstanding
under the Plan, 337,227 shares of Common Stock remain available for future
option grants and 94,756 shares had been issued upon exercise of previously
granted options.
The following summary of the Plan is provided as a matter of convenience only
and is qualified in its entirety by the text of the Plan, which is attached to
this Prospectus and incorporated by reference herein.
The Plan provides for grants to employees (including officers and employee
directors) of "incentive stock options" ("ISOs") within the meaning of Section
422 of the Internal Revenue Code of 1986, as amended (the "Code"), and for
grants of non-statutory options ("NSOs") to employees (including officers and
employee directors) and consultants (not including nonemployee directors) of the
Company or any subsidiary of the Company. See "Certain Federal Income Tax
Aspects of the Plan" below for information concerning the tax treatment of
incentive stock options and nonstatutory options.
The Plan is not a qualified deferred compensation plan under Section 401(a) of
the Code, and is not subject to the provisions of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA").
Purposes of the Plan
The purposes of the Plan are, among others, to attract and retain the best
available personnel, to provide additional incentive to employees and
consultants of the Company to increase the value of the Company to its
shareholders, and to encourage their continued service to the Company.
Administration
The Plan is administered by the Company's Board of Directors or a committee of
the Board (the "Administrator"). The Administrator may determine the terms of
the options granted, including the exercise price, the number of shares subject
to each option, and the conditions to and timing of exercisability of the
option. The Administrator also has the full power to select the individuals to
whom options will be granted and to make any combination of grants to any
participants. The Administrator's interpretation and construction of any
provision of the Plan are final and binding upon all participants.
Members of the Board receive no additional compensation for their services in
connection with the administration of the Plan. All directors currently hold
office until the annual meeting of shareholders of the Company following their
election, or until their successors are duly elected and qualified. Directors
may be removed from office by the vote of the majority of outstanding shares
pursuant to the provisions of Section 303 of the California General Corporation
Law or by court order.
Securities to be Purchased
The securities to be purchased under the Plan are shares of Common Stock, $.001
par value, of the Company. The holders of Common Stock are entitled to one vote
per share on all matters to be voted upon by the shareholders. Subject to
preferences that may be applicable to any outstanding Preferred Stock the
holders of Common Stock are entitled to receive ratably such dividends, if any,
as may be declared from time to time by the Board of Directors out of funds
legally available therefor. In the event of a liquidation, dissolution or
winding up of the Company, the holders of Common Stock are entitled to share
ratably in all assets remaining after payment of liabilities, subject to prior
rights of Preferred Stock, if any, then outstanding. The Common Stock has no
preemptive or conversion rights or other subscription rights. There are no
redemption or sinking fund provisions available to the Common Stock. The Company
has adopted provisions in its Restated Articles of Incorporation and Bylaws to
eliminate the ability of shareholders to take actions by written consent. These
provisions may have the effect of discouraging, delaying or preventing a change
in control of the Company.
The Company has 1,000,000 authorized shares of "blank check" Preferred Stock
that may be issued with such designations, rights and preferences as may be
determined from time to time by the Board of Directors, without any further vote
or action by the shareholders. The issuance of Preferred Stock, while providing
desirable flexibility in connection with possible acquisitions and other
corporate purposes, could have the effect of making it more difficult for a
third party to acquire a majority of the outstanding voting stock of the
Company, thereby delaying, deferring or preventing a change in control of the
Company. Furthermore, such Preferred Stock may have other rights, including
economic rights, senior to the Common Stock and as a result, the issuance of
such Preferred Stock could have a material adverse effect on the market value of
the Common Stock. Although the Company has no present intention to issue any
additional shares of its Preferred Stock, there can be no assurance that the
Company will not do so in the future.
Eligibility
The Plan provides that incentive stock options may be granted only to employees,
(including officers and employee directors) of the Company or any subsidiary of
the Company, while nonstatutory stock options may be granted not only to
employees (including officers and employee directors), but also consultants (not
including non-employee directors) of the Company or any subsidiary of the
Company.
The Plan does not set either a maximum or minimum number of shares of Common
Stock which may be granted under options to any person. However, no person may
hold in a calendar year more than $100,000 worth of incentive stock options
(determined by the total fair market value of shares issuable upon exercise of
the vested options, with the fair market value determined by the exercise price
of the options at time of grant) that first become exercisable in that calendar
year. To the extent options have been issued to a person above the $100,000
limit, such options are treated as nonstatutory options. See "Certain Federal
Income Tax Aspects of the Plan" below.
Terms and Conditions of Options
Each option is evidenced by a stock option agreement between the Company and the
optionee, and is subject to the following terms and conditions:
(a) Exercise of the Option. The Administrator determines when options may
be exercised. An option is exercised by giving written notice of exercise to the
Company specifying the number of full shares of Common Stock to be purchased and
by tendering of payment of the purchase price. The purchase price of the shares
purchased upon exercise of an option shall be paid in consideration of such form
as is determined by the Administrator, and such form of consideration may vary
for each option. Each optionee should refer to his or her individual option
agreement for information as to the exercisability and form of consideration
applicable to his or her option.
(b) Exercise Price and Consideration. The option exercise price for each
share issuable under an ISO may not be less than 100% of the fair market value
per share on the date of grant. The option exercise price for each share
issuable under an NSO may not be less than 85% of the fair market value per
share on the date of grant of the option. In the case of either ISOs or NSOs
granted to a person who at the time of the grant owns stock representing more
than 10% of the total combined voting power of all classes of stock of the
Company or any parent or subsidiary, the option exercise price for each share
covered by such option may not be less than 1 10% of the fair market value of a
share of Common Stock on the date of grant of such option.
The Administrator of the Plan determines the fair market value of the
Common Stock. As long as the Common Stock of the Company is trading on the
National Market System of the National Association of Securities Dealers, Inc.
Automated Quotation System ("NASDAQ-NMS") (as of the date of this Prospectus,
the Common Stock was traded on NASDAQ-NMS), the fair market value of a share of
Common Stock of the Company shall be the closing sales price for such stock as
quoted on such system on the date of determination (if for a given day no sales
were reported, the closing bid on that day shall be used), as such price is
reported in The Wall Street Journal or such other source the Administrator deems
reliable.
The consideration to be paid for shares issued on exercise of options
granted under the Plan, including the method of payment, is determined by the
Administrator (in the case of ISOs, such determination shall be made at the time
of grant) and may consist entirely of cash, check, promissory note, other shares
of Common Stock that either have been beneficially owned by the optionee for at
least six months or were not acquired, directly or indirectly, from the Company,
with a fair market value on the surrender date equal to the aggregate exercise
price of the shares as to which such option shall be exercised, or such other
consideration and method of payment for the issuance of shares to the extent
permitted under Sections 408 and 409 of the California General Corporation Law.
The Administrator may also authorize payments by any combination of the above
methods or such other consideration and method of payment for the issuance of
shares to the extent permitted under applicable laws.
(c) Termination of Status As an Employee or Consultant. In the event of
termination of an optionee's employment or consulting relationship with the
Company for any reason other than death or permanent disability, the optionee
may exercise his or her option to the extent that he or she was entitled to
exercise it at the date of termination, but such exercise must be made within
thirty days (or such other period of time determined by the Administrator, but
not exceeding three months in the case of an ISO or six months in the case of an
NSO, with such determination in the case of an ISO being made at the time of
grant of the option).
(d) Disability. If an optionee is unable to continue his or her employment
or consulting relationship with the Company as a result of his or her total and
permanent disability, an option may be exercised (to the extent it was
exercisable upon the date of termination) within six months of termination (or
such other period of time determined by the Administrator, but not to exceed 12
months, with such determination in the case of an incentive stock option being
made at the time of grant of the option), but an option may not be exercised
later than the date of expiration of the term of the option as set out in the
option agreement. Notwithstanding the foregoing, if an optionee is unable to
continue his or her employment or consulting relationship with the Company as a
result of any disability not constituting a total and permanent disability (as
defined in Section 22(e)(3) of the Code), he may, but only within six months
from the date of such termination (but in no event later than the date of
expiration of the term of such option as set forth in the option agreement),
exercise his option to the extent he was entitled to exercise it at the date of
such termination; provided, however, that if such optionee fails to exercise any
ISO within three months from the date of termination of employment, such option
shall be treated for federal income tax purposes as a NSO. To the extent that
optionee was not entitled to exercise the option at the date of termination, or
if optionee does not exercise such option (which he was entitled to exercise)
within the time specified herein, the option shall terminate.
(e) Death. If an optionee should die while employed, or within 30 days
following the termination of optionee's continuous status as an employee or
consulting relationship, the optionee's estate or a person who has acquired the
right to exercise the option by bequest or inheritance may exercise the option
at any time within six months after the date of death (but not later than the
date of expiration of the term of the option as set out in the option
agreement). The option shall be exercisable to the extent the optionee would
have been entitled So exercise the option had the optionee continued living and
remained an employee for six months after the date of death. If an optionee
shall die within 30 days (or such other period not exceeding three months as
determined by the Administrator, with the determination in the case of an ISO
being made at the time of grant) after termination of employment, the option
shall be exercisable at any time within six months after the date of death (but
in no event later than the date of expiration of the term of the option as set
forth in the option agreement).
(f) Rule 16b-3. Options granted to persons subject to Section 16(b) of the
Securities Exchange Act of 1934 (the "Exchange Act") must comply with Rule 16b-3
and shall contain such additional conditions or restrictions as may be required
thereunder to qualify for the maximum exemption from Section 16 of the Exchange
Act with respect to Plan transactions.
(g) Term of Options. The term of an option is determined by the specific
option agreement. Incentive stock options may not have a term of more than 10
years. Furthermore, the maximum term for an option granted to an optionee who
immediately before the grant of such option owns more than 10% of the total
combined voting power of all classes of stock of the Company or any parent or
subsidiary is five years. No option may be exercised by any person after its
term expires.
(h) Option Not Transferable. An option is nontransferable by the optionee
other than by will or the laws of descent and distribution. An option is
exercisable during the optionee's lifetime only by the optionee and the
designation of a beneficiary by an optionee will not constitute a transfer.
(i) Change in Control Transactions. In the event of a sale of all or
substantially all of the assets of the Company, or the merger of the Company
with or into another corporation, the option may be assumed or an equivalent
option substituted by the successor corporation. In the event of the proposed
dissolution or liquidation of the Company, each option will terminate to the
extent it has not been previously exercised.
(j) Other Provisions. The option agreement may contain other terms,
provisions and conditions as may be determined by the Administrator as long as
they are consistent with the Plan.
Adjustments upon Changes in Capitalization
In the event any change such as a stock split or dividend is made in the
Company's capitalization that results in an increase or decrease in the number
of outstanding shares of Common Stock without receipt of consideration by the
Company, appropriate adjustment shall be made in the exercise price and in the
number of shares subject to each option, as well as in the number of shares
available for issuance under the Plan.
Amendment and Termination of the Plan
The Board may amend the Plan at any time or from time to time or may terminate
the Plan without approval of the shareholders, except that shareholder approval
is required for any amendment to the Plan in such a manner and to such a degree
as required to comply with Rule 16b-3 or with Section 422 of the Code (or any
other applicable law or regulation, including the requirements of any Stock
Exchange). However, no action by the Board or shareholders may adversely alter
or impair any option previously granted under the Plan, unless mutually agreed
otherwise between the optionee and the Board. The Plan shall terminate in
November 1999. Any options outstanding at that time under the Plan shall remain
outstanding until they expire by their own terms.
Certain Federal Income Tax Aspects of the Plan
The following is a brief summary of the effect of federal income taxation upon
an optionee and the Company with respect to the grant of options and purchase of
shares under the Plan. This summary does not purport to be complete and does not
address the federal income tax consequences to taxpayers with special tax
status. In addition, this summary does not discuss the provisions of the income
tax laws of any municipality, state or foreign country in which the participant
may reside, and does not discuss estate, gift or other tax consequences other
than income tax consequences. The summary is based on federal income tax laws in
effect as of the date of this Prospectus, which could change. The Company
advises each optionee to consult his or her own tax advisor regarding the
taxation of option grants and exercises and for reference to applicable
provisions of the Code.
Options granted under the Plan may be either "incentive stock
options," as defined in Section 422 of the Code, or nonstatutory
options.
If an option granted under the Plan is an ISO, the optionee will recognize no
income upon grant of the incentive stock option and incur no tax liability upon
the exercise unless the alternative minimum tax rules apply (see below). The
Company will not be allowed a deduction for federal income tax purposes as a
result of the exercise of an ISO regardless of the applicability of the
alternative minimum tax. Upon the sale or exchange of the shares more than two
years after grant of the ISO and one year after exercise of the ISO, any gain
will be taxed to the optionee as long-term capital gain. If both of these
holding periods are not satisfied at the time of disposition of the shares,
including by gift (a "premature disposition"), the optionee will recognize
ordinary income in connection with such disposition equal to the difference
between the exercise price and the lower of the fair market value of the stock
at the date of the option exercise or the sale price of the stock. A different
rule for measuring ordinary income upon such a premature disposition may apply
if the optionee is also an officer, director or 10% shareholder of the Company.
The Company will be entitled to a deduction in the same amount as the ordinary
income recognized by the optionee. Any gain recognized on such a premature
disposition of the shares in excess of the amount treated as ordinary income
will be characterized as long-term capital gain if the sale occurs more than one
year after exercise of the option or as short-term capital gain if the sale is
made earlier. Currently, the federal income tax rate on net capital gain (net
long-term capital gain minus net short-term capital loss) is capped at 28%,
whereas other income is taxable at federal rates of as much as 39.6%. Capital
losses are allowed in full against capital gains plus $3,000 of other income.
All options which are not ISOs are treated as NSOs. An optionee will not
recognize any taxable income at the time he or she is granted an NSO. However,
upon its exercise, the optionee will recognize ordinary income for tax purposes
measured by the excess of the then fair market value of the shares over the
option price. In certain circumstances, where the shares are subject to a
substantial risk of forfeiture when acquired or where sale of shares acquired
upon exercise of an option could subject the optionee, because of his or her
status as a director, officer or 10% shareholder of the Company, to suit under
Section 16 of the Exchange Act, the date of recognition of such ordinary income
may be deferred for up to six months unless the optionee timely files an
election with the Internal Revenue Service under Section 83(b) of the Code. The
optionee's holding period for long-term capital gains purposes commences as of
the date he or she recognizes ordinary income with respect to an option
exercise. Upon resale of such shares by the optionee, any difference between the
sales price and the exercise price, to the extent not recognized as ordinary
income as provided above, will be treated as capital gain or loss, and will
qualify for long-term capital gain or loss treatment if the shares have been
held for more than one year. The Company will be entitled to a tax deduction in
the amount and at the time that the optionee recognizes ordinary income with
respect to shares acquired upon exercise of an NSO
Alternative Minimum Tax
The exercise of an ISO may subject the optionee to the alternative minimum tax
("AMT") under Section 55 of the Code. The AMT is calculated by applying a tax
rate of 26% to alternative minimum taxable income up to $175,000 ($87,500 for
married taxpayers filing separately) and 28% to alternative minimum income above
$175,000. Alternative minimum taxable income is equal to (i) taxable income
adjusted for certain items (including any excess at the time of exercise of an
incentive stock option of the value of the stock over the exercise price as
described below), plus (ii) items of tax preference less (iii) an exclusion of
$45,000 for joint returns and $33,750 for individual returns.
In computing alternative minimum taxable income, shares purchased upon exercise
of an ISO are treated as if they had been acquired by the optionee pursuant to
an NSO. Accordingly, alternative minimum taxable income includes the excess of
the value of the stock subject to such option over the exercise price. That
excess normally is increased as of the date of exercise of the option, but a
special rule applies. This may be particularly significant if shares subject to
a repurchase option of the Company are purchased upon exercise of an ISO or if a
sale of the shares acquired upon exercise of an option could subject an optionee
to suit under Section 16(b) of the Exchange Act. Under certain circumstances, an
optionee may affect the timing and measurement of AMT by filing an election with
the Internal Revenue Service under Section 83(b) of the Code within 30 days
after the date of exercise of an ISO. Therefore, an optionee should consult his
or her own tax advisor prior to exercising an ISO concerning the advisability of
filing an election under Section 83(b) of the Code.
If an optionee pays AMT in excess of his or her regular tax liability, the
amount of such AMT relating to ISOs may be carried forward as a credit against
any subsequent year's regular tax in excess of the AMT.
<PAGE>
RESTRICTIONS ON RESALE
The officers and directors of the Company eligible to participate in the Plan
may be deemed to be "affiliates" of the Company as that term is defined under
the Securities Act. Common Stock acquired under the Plan by an affiliate may
only be reoffered or resold pursuant to an effective registration statement or
pursuant to Rule 144 under the Securities Act or another exemption from the
registration requirements of the Securities Act. Such reoffers or resales may
not be made pursuant to this Prospectus.
INCORPORATION OF DOCUMENTS BY REFERENCE
This Prospectus incorporates by reference the following documents
that have been filed by the Company with the Securities and
Exchange Commission, or portions of such documents:
1. The Company's Prospectus filed on November 18, 1994 pursuant to Rule
424(b)(4) of the Securities Act, which contains audited financial statements for
the Company's latest fiscal year for which such statements have been filed.
2. Items 1 and 2 of the Company's Registration Statement on Form 8-A filed on
October 26, 1994 pursuant to Section 12 of the Exchange Act.
All documents subsequently filed by the Company pursuant to Sections 13(a),
13(c), 14 and 15(d) of the Exchange Act, prior to the filing of a post-effective
amendment which indicates that all securities offered have been sold or which
deregisters all securities then remaining unsold, shall be deemed to be
incorporated by reference in this Prospectus and to be part hereof from the date
of filing such documents.
The Company hereby undertakes to provide without charge to each person to whom a
copy of this Prospectus has been delivered, on the written or oral request of
any such person, copies of the documents described above and all documents
subsequently filed by the Company pursuant to Sections 13(a), 13(c), 14 and
15(d) of the Exchange Act (including Annual Reports, Forms 10-K and 10-Q and
Proxy Statements) prior to the filing of a post-effective amendment which
indicates that all securities offered have been sold or which deregisters all
securities then remaining unsold, all of which are hereby incorporated in this
Prospectus by reference, effective upon the filing date of such documents.
Requests for such copies, or additional information regarding the Plan and its
administration should be directed to the Company's Stock Administrator at the
Company's offices at 851 Martin Avenue, Santa Clara, California 95050 (telephone
number: (408) 450-8000).
<PAGE>
Exhibit 10.2b
QUALITY SEMICONDUCTOR, INC.
1989 STOCK OPTION PLAN
1. Purposes of the Plan. The purposes of this Stock Option Plan are to attract
and retain the best available personnel for positions of substantial
responsibility, to provide additional incentive to the Employees and Consultants
of the Company and to promote the success of the Company's business.
Options granted hereunder may be either Incentive Options or
Nonstatutory Stock Options, at the discretion of Board and as reflected in the
terms of the written option agreement.
2. Definitions. As used herein, the following definitions shall apply:
(a) "Board" shall mean the Committee, if one has been appointed, or the
Board of Directors of the Company, if no Committee is appointed.
(b) "Code" shall mean the Internal Revenue Code of 1986, as amended.
(c) "Committee" shall mean the Committee appointed by the Board of
Directors in accordance with paragraph (a) of Section 4 of the Plan, if
one is appointed.
(d) "Common Stock" shall mean the Common Stock of the Company.
(e) "Company" shall mean Quality Semiconductor, Inc., a California
corporation.
(f) "Consultant" shall mean any person who is engaged by the Company or any
Parent or Subsidiary to render consulting services and is compensated
for such consulting services, and any director of the Company whether
compensated for such services or not; provided that if and in the event
the Company registers any class of any equity security pursuant to
Section 12 of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), the term Consultant shall thereafter not include
directors who are not compensated for their services or are paid only a
director's fee by the Company.
(g) "Continuous Status as an Employee or Consultant" shall mean the absence
of any interruption or termination of service as an Employee or
Consultant. Continuous Status as an Employee or Consultant shall not be
considered interrupted in the case of sick leave, military leave, or
any other leave of absence approved by the Board; provided that such
leave is for a period of not more than 90 days or reemployment upon the
expiration of such leave is guaranteed by contract or statute.
(h) "Employee" shall mean any person, including officers and directors,
employed by the Company or any Parent or Subsidiary of the Company. The
payment of a director's fee by the Company shall not be sufficient to
constitute "employment" by the Company.
(i) "Incentive Stock Option" shall mean an Option intended to qualify as an
incentive stock option within the meaning of Section 422A of the Code.
(j) "Nonstatutory Stock Option" shall mean an Option not intended to
qualify as an Incentive Stock Option.
(k) "Option" shall mean a stock option granted pursuant to the Plan.
(1) "Optioned Stock" shall meant he Common Stock subject to an Option.
(m) "Optionee" shall mean an Employee or Consultant who receives an Option.
(n) "Parent" shall mean a "parent corporation", whether now or hereafter
existing, as defined in Section 425(e) of the Code.
(o) "Plan" shall mean this 1989 Stock Option Plan.
(p) "Share" shall mean a share of the Common Stock, as adjusted in
accordance with Section 11 of the Plan.
(q) "Subsidiary" shall mean a "subsidiary corporation", whether now or
hereafter existing, as defined in Section 425(f) of the Code.
3. Stock Subject to the Plan. Subject to the provisions of Section 11 of
the Plan, the maximum aggregate number of shares which may be optioned and sold
under the Plan is 1,116,666 shares of Common Stock. The Shares may be
authorized, but unissued, or reacquired Common Stock.
If an Option should expire or become unexercisable for any reason
without having been exercised in full, the unpurchased Shares which were subject
thereto shall, unless the Plan shall have been terminated, become available for
future grant under the Plan. Notwithstanding any other provision of the Plan,
shares issued under the Plan and later repurchased by the Company shall not
become available for future grant or sale under the Plan.
4. Administration of the Plan.
(a) Procedure. The Plan shall be administered by the Board of Directors of
the Company.
(i) Subject to subparagraph (ii), the Board of Directors may appoint a
Committee consisting of not less than two members of the Board of Directors to
administer the Plan on behalf of the Board of Directors, subject to such terms
and conditions as the Board of Directors may prescribe. Once appointed, the
Committee shall continue to serve until otherwise directed by the Board of
Directors. Members of the Board who are either eligible for Options or have been
granted Options may vote on any matters affecting the administration of the Plan
or the grant of any Options pursuant to the Plan, except that no such member
shall act upon the granting of an Option to himself, but any such member may be
counted in determining the existence of a quorum at any meeting of the Board
during which action is taken with respect to the granting of Options to him.
(ii) Notwithstanding the foregoing subparagraph (i), if and in any event
the Company registers any class of any equity security pursuant to Section 12 of
the Exchange Act, from the effective date of such registration until six months
after the termination of such registration' any grants of Options to officers or
directors shall only be made by the Board of Directors; provided, however, that
if a majority of the Board of Directors is eligible to participate in this Plan
or any other stock option or other stock plan of the Company or any of its
affiliates, or has been eligible at any time during the prior one-year period
(or, if shorter, the period following the initial registration of the Company's
equity securities under Section 12 of the Exchange Act), any grants of Options
to directors must be made by, or only in accordance with the recommendation of,
a Committee consisting of three or more persons, who may but need not be
directors or employees of the Company, appointed by the Board of Directors and
having full authority to act in the matter, none of whom is eligible to
participate in this Plan or any other stock option or other stock plan of the
Company or any of its affiliates, or has been eligible at any time during the
prior one-year period (or, if shorter, the period following the initial
registration of the Company's equity securities under Section 12 of the Exchange
Act). Any Committee administering the Plan with respect to grants to officers
who are not also directors shall conform to the requirements of the preceding
sentence. Once appointed, the Committee shall continue to serve until otherwise
directed by the Board of Directors.
(iii) Subject to the foregoing subparagraphs (i) and (ii), from time to
time the Board of Directors may increase the size of the Committee and appoint
additional members thereof, remove members (with or without cause) and appoint
new members in substitution therefor, fill vacancies however caused, or remove
all members of the Committee and thereafter directly administer the Plan.
(b) Powers of the Board. Subject to the provisions of the Plan, the Board
shall have the authority, in its discretion: (i) to grant Incentive Stock
Options or Nonstatutory Stock Options; (ii) to determine, upon review of
relevant information and in accordance with Section 8(b) of the Plan, the fair
market value of the Common Stock; (iii) to determine the exercise price per
share of Options to be granted, which exercise price shall be determined in
accordance with Section 8(a) of the Plan; (iv) to determine the Employees or
Consultants to whom, and the time or times at which, Options shall be granted
and the number of shares to be represented by each Option, (v) to interpret the
Plan, (vi) to prescribe, amend and rescind rules and regulations relating to the
Plan, (vii) to determine the terms and provisions of each Option granted (which
need not be identical) and, with the consent of the holder thereof, modify or
amend each Option, (viii) to authorize any person to execute on behalf of the
Company any instrument required to effectuate the grant of an Option previously
granted by the Board; and (ix) to make all other determinations deemed necessary
or advisable for the administration of the Plan.
(c) Effect of Board's Decision. All decisions, determinations and
interpretations of the Board shall be final and binding on all Optionees and any
other holders of any Options granted under the Plan.
5. Eligibility
(a) Nonstatutory Stock Options may be granted only to Employees and
Consultants. Incentive Stock Options may be granted only to Employees.
An Employee or Consultant who has been granted an Option may, if he is
otherwise eligible, be granted an additional Option or Options.
(b) Each Option shall be designated in the written option agreement as
either an Incentive Stock Option or a Nonstatutory Stock Option.
However, notwithstanding such designations, to the extent that the
aggregate fair market value of the Shares with respect to which Options
designated as Incentive Stock Options are exercisable for the first
time by any Optionee during any calendar year (under all plans of the
Company) exceeds $100,000, such Options shall be treated as
Nonstatutory Stock Options.
(c) For purposes of Section 5(b), Options shall be taken into account in
the order in which they were granted, and the fair market value of the
Shares shall be determined as of the time the Option with respect to
such Shares is granted.
(d) The Plan shall not confer upon any Optionee any right with respect to
continuation of employment or consulting relationship with the Company,
nor shall it interfere in any way with his right or the Company's right
to terminate his employment or consulting relationship at any time,
with or without cause.
6. Term of Plan. The Plan shall become effective upon the earlier to occur of
its adoption by the Board of Directors or its approval by the shareholders of
the Company as described in Section 17 of the Plan. It shall continue in effect
for a term of ten (10) years unless sooner terminated under Section 13 of the
Plan.
7. Term of Option. The term of each Incentive Stock Option shall be ten (10)
years from the date of grant thereof or such shorter term as may be provided in
the Incentive Stock Option Agreement. The term of each Nonstatutory Stock Option
shall be ten (10) years and one (1) day from the date of grant thereof or such
shorter term as may be provided in the Nonstatutory Stock Option Agreement.
However, in the case of an Option granted to an Optionee who, at the time the
Option is granted, owns stock representing more than ten percent (10%) of the
voting power of all classes of stock of the Company or any Parent or Subsidiary,
(a) if the Option is an Incentive Stock Option, the term of the Option shall be
five (5) years from the date of grant thereof or such shorter term as may be
provided in the Incentive Stock Option Agreement, or (b) if the Option is a
Nonstatutory Stock Option, the term of the Option shall be five (5) years and
one (1) day from the date of grant thereof or such shorter term as may be
provided in the Nonstatutory Stock Option Agreement.
8. Exercise Price and Consideration.
(a) The per Share exercise price for the Shares to be issued pursuant to
exercise of an Option shall be such price as is determined by the
Board, but shall be subject to the following:
(i) In the case of an Incentive Stock Option
(A) granted to an Employee who, at the time of the grant of such
Incentive Stock Option, owns stock representing more than
ten percent (10%) of the voting power of all classes of
stock of the Company or any Parent or Subsidiary, the per
Share exercise price shall be no less than 110% of the fair
market value per Share on the date of grant.
(B) granted to any Employee, the per Share exercise price shall
be no less than 100% of the fair market value per Share on
the date of grant.
(ii) In the case of a Nonstatutory Stock Option
(A) granted to a person who, at the time of the grant of such
Option, owns stock representing more than ten percent (10%)
of the voting power of all classes of stock of the Company
or any Parent or Subsidiary, the per Share exercise price
shall be no less than 110% of the fair market value per
Share on the date of the grant.
(B) granted to any person, the per Share exercise price shall be
no less than 85% of the fair market value per Share on the
date of grant.
For purposes of this Section 8(a), in the event that an Option is amended to
reduce the exercise price, the date of grant of such Option shall thereafter be
considered to be the date of such amendment.
(b) The fair market value shall be determined by the Board in its
discretion; provided, however, that where there is a public market for
the Common Stock the fair market value per Share shall be the mean of
the bid and asked prices (or the closing price per share if the Common
Stock is listed on the National Association of Securities Dealers
Automated Quotation ("NASDAQ") National Market System) of the Common
Stock for the date of grant, as reported in the Wall Street Journal
(or, if not so reported, as otherwise reported by the NASDAQ System)
or, in the event the Common Stock is listed on a stock exchange, the
fair market value per Share shall be the closing price on such exchange
on the date of grant of the Option, as reported in the Wall Street
Journal.
(c) The consideration to be paid for the Shares to be issued upon exercise
of an Option, including the method of payment, shall be determined by
the Board and may consist entirely of cash, check promissory note,
other Shares of Common Stock which (i) either have been owned by the
Optionee for more than six (6) months on the date of surrender or were
not acquired, directly or indirectly, from the Company, and (ii) have a
fair market value on the date of surrender equal to the aggregate
exercise price of the Shares as to which said Option shall be
exercised, or any combination of such methods of payment, or such other
consideration and method of payment for the issuance of Shares to the
extent permitted under Sections 408 and 409 of the California General
Corporation Law. In making its determination as to the type of
consideration to accept, the Board shall consider if acceptance of such
consideration may be reasonably expected to benefit the Company
(Section 315(b) of the California General Corporation Law).
9. Exercise of Option.
(a) Procedure for Exercise: Rights as a Shareholder. Any Option granted
hereunder shall be exercisable at such times and under such conditions
as determined by the Board, including performance criteria with respect
to the Company and/or the Optionee, and as shall be permissible under
the terms of the Plan; provided that such Option shall become
exercisable at the rate of at least twenty percent (20%) per year over
five (5) years from the date the Option is granted.
An Option may not be exercised for a fraction of a Share.
An Option shall be deemed to be exercised when written notice of such
exercise has been given to the Company in accordance with the terms of
the Option by the person entitled to exercise the Option and full
payment for the Shares with respect to which the Option is exercised
has been received by the Company. Full payment may, as authorized by
the Board, consist of any consideration and method of payment allowable
under Section 8(c) of the Plan. Until the issuance (as evidenced by the
appropriate entry on the books of the Company or of a duly authorized
transfer agent of the Company) of the stock certificate evidencing such
Shares, no right to vote or receive dividends or any other rights as a
shareholder shall exist with respect to the Optioned Stock,
notwithstanding the exercise of the Option. The Company shall issue (or
cause to be issued) such stock certificate promptly upon exercise of
the Option. In the event that the exercise of an Option is treated in
part as the exercise of an Incentive Stock Option and in part as the
exercise of a Nonstatutory Stock Option pursuant to Section 5(b), the
Company shall issue a separate stock certificate evidencing the Shares
treated as acquired upon exercise of an Incentive Stock Option and a
separate stock certificate evidencing the Shares treated as acquired
upon exercise of a Nonstatutory Stock Option, and shall identify each
such certificate accordingly in its stock transfer records. No
adjustment will be made for a dividend or other right for which the
record date is prior to the date the stock certificate is issued,
except as provided in Section 11 of the Plan.
Exercise of an Option in any manner shall result in a decrease in the
number of Shares which thereafter may be available, both for purposes
of the Plan and for sale under the Option, by the number of Shares as
to which the Option is exercised.
(b) Termination of Status as an Employee or Consultant. In the event of
termination of an Optionee's Continuous Status as an Employee or
Consultant (as the case may be), such Optionee may, but only within
thirty (30) days (or such other period of time, not exceeding three (3)
months in the case of an Incentive Stock Option or six (6) months in
the case of a Nonstatutory Stock Option, as is determined by the Board,
with such determination in the case of an Incentive Stock Option being
made at the time of grant of the Option) after the date of such
termination (but in no event later than the date of expiration of the
term of such Option as set forth in the Option Agreement), exercise his
Option to the extent that he was entitled to exercise it at the date of
such termination. To the extent that he was not entitled to exercise
the Option at the date of such termination, or if he does not exercise
such Option (which he was entitled to exercise) within the time
specified herein, the Option shall terminate.
(c) Disability of Optionee.
(i) Notwithstanding the provisions of Section 9(b) above, in the event of
termination of an Optionee's Continuous Status as an Employee or Consultant as a
result of his total and permanent disability (as defined in Section 22(e)(3) of
the Code), he may, but only within six (6) months (or such other period of time
not exceeding twelve (12) months as is determined by the Board, with such
determination in the case of an Incentive Stock Option being made at the time of
grant of the Option) from the date of such termination (but in no event later
than the date of expiration of the term of such Option as set forth in the
Option Agreement), exercise his Option to the extent he was entitled to exercise
it at the date of such termination. To the extent that he was not entitled to
exercise the Option at the date of termination, or if he does not exercise such
Option (which he was entitled to exercise) within the time specified herein, the
Option shall terminate.
(ii) Notwithstanding the provisions of Section 9(b) above, in the event of
termination of an Optionee's Continuous Status as an Employee or Consultant as a
result of any disability not constituting a total and permanent disability (as
defined in Section 22(e)(3) of the Code), he may, but only within six (6) months
from the date of such termination (but in no event later than the date of
expiration of the term of such Option as set forth in the Option Agreement),
exercise his Option to the extent he was entitled to exercise it at the date of
such termination; provided, however, that if such Optionee fails to exercise any
Incentive Stock Option within three (3) months from the date of termination of
employment, such Option shall be treated for federal income tax purposes as a
Nonstatutory Stock Option. To the extent that Optionee was not entitled to
exercise the Option at the date of termination, or if Optionee does not exercise
such Option (which he was entitled to exercise) within the time specified
herein, the Option shall terminate.
(d) Death of Optionee. Notwithstanding the provisions of Section 9(b)
above, in the event of the death of an Optionee:
(i) during the term of the Option who is at the time of his death an
Employee or Consultant of the Company and who shall have been in Continuous
Status as an Employee or Consultant since the date of grant of the Option, the
Option may be exercised, at any time within six (6) months following the date of
death (but in no event later than the date of expiration of the term of such
Option as set forth in the Option Agreement), by the Optionee's estate or by a
person who acquired the right to exercise the Option by bequest or inheritance,
but only to the extent of the right to exercise that would have accrued had the
Optionee continued living and remained in Continuous Status as an Employee or
Consultant six (6) months after the date of death, or
(ii) within thirty (30) days (or such other period of time not exceeding
three (3) months as is determined by the Board, with such determination in the
case of an Incentive Stock Option being made at the time of grant of the Option)
after the termination of Continuous Status as an Employee or Consultant, the
Option may be exercised, at any time within six (6) months following the date of
death (but in no event later than the date of expiration of the term of such
Option as set forth in the Option Agreement), by the Optionee's estate or by a
person who acquired the right to exercise the Option by bequest or inheritance,
but only to the extent of the right to exercise that had accrued at the date of
termination.
10. Non-Transferability of Options. The Option may not be sold, pledged,
assigned, hypothecated, transferred, or disposed of in any manner other than by
will or by the laws of descent or distribution and may be exercised, during the
lifetime of the Optionee, only by the Optionee.
11. Adjustments Upon Changes in Capitalization or Merger. Subject to any
required action by the shareholders of the Company, the number of shares of
Common Stock covered by each outstanding Option, and the number of shares of
Common Stock which have been authorized for issuance under the Plan but as to
which no Options have yet been granted or which have been resumed to the Plan
upon cancellation or expiration of an Option, as well as the price per share of
Common Stock covered by each such outstanding Option, shall be proportionately
adjusted for any increase or decrease in the number of issued shares of Common
Stock resulting from a stock split, reverse stock split, stock dividend,
combination or reclassification of the Common Stock, or any other increase or
decrease in the number of issued shares of Common Stock effected without receipt
of consideration by the Company; provided, however, that conversion of any
convertible securities of the Company shall not be deemed to have been "effected
without receipt of consideration." Such adjustment shall be made by the Board,
whose determination in that respect shall be final, binding and conclusive.
Except as expressly provided herein, no issuance by the Company of shares of
stock of any class, or securities convertible into shares of stock of any class,
shall affect, and no adjustment by reason thereof shall be made with respect to,
the number or price of shares of Common Stock subject to an Option.
In the event of the proposed dissolution or liquidation of the Company,
the Option will terminate immediately prior to the consummation of such proposed
action. In the event of a merger of the Company with or into another
corporation, the Option may be assumed or an equivalent option may be
substituted by such successor corporation or a parent or subsidiary of such
successor corporation.
12. Time of Granting Options. The date of grant of an Option shall, for all
purposes, be the date on which the Board makes the determination granting such
Option. Notice of the determination shall be given to each Employee or
Consultant to whom an Option is so granted within a reasonable time after the
date of such grant.
13. Amendment and Termination of the Plan.
(a) Amendment and Termination. The Board may amend or terminate the Plan
from time to time in such respects as the Board may deem advisable;
provided that, the following revisions or amendments shall require
approval of the shareholders of the Company in the manner described in
Section 17 of the Plan:
(i) any increase in the number of Shares subject to the Plan, other
than in connection with an adjustment under Section 11 of the
Plan;
(ii) any change in the designation of the class of persons eligible to
be granted Options; or
(iii) if the Company has a class of equity securities registered under
Section 12 of the Exchange Act at the time of such revision or
amendment, any material increase in the benefits accruing to
participants under the Plan.
(b) Shareholder Approval. If any amendment requiring shareholder approval
under Section 13(a) of the Plan is made subsequent to the first
registration of any class of equity securities by the Company under
Section 12 of the Exchange Act, such shareholder approval shall be
solicited as described in Section 17 of the Plan.
(c) Effect of Amendment or Termination. Any such amendment or termination
of the Plan shall not affect Options already granted and such Options
shall remain in full force and effect as if this Plan had not been
amended or terminated, unless mutually agreed otherwise between the
Optionee and the Board, which agreement must be in writing and signed
by the Optionee and the Company.
14. Conditions Upon Issuance of Shares. Shares shall not be issued pursuant to
the exercise of an Option unless the exercise of such Option and the issuance
and delivery of such Shares pursuant thereto shall comply with all relevant
provisions of law, including, without limitation, the Securities Act of 1933, as
amended, the Exchange Act, the rules and regulations promulgated thereunder, and
the requirements of any stock exchange upon which the Shares may then be listed,
and shall be further subject to the approval of counsel for the Company with
respect to such compliance.
As a condition to the exercise of an Option, the Company may require
the person exercising such Option to represent and warrant at the time of any
such exercise that the Shares are being purchased only for investment and
without any present intention to sell or distribute such Shares if, in the
opinion of counsel for the Company, such a representation is required by any of
the aforementioned relevant provisions of law.
15. Reservation of Shares. The Company, during the term of this Plan, will
at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
The inability of the Company to obtain authority from any regulatory
body having jurisdiction, which authority is deemed by the Company's counsel to
be necessary to the lawful issuance and sale of any Shares hereunder, shall
relieve the Company of any liability in respect of the failure to issue or sell
such Shares as to which such requisite authority shall not have been obtained.
16. Option Agreement. Options shall be evidenced by written option
agreements in such form as the Board shall approve.
17. Shareholder Approval.
(a)Continuance of the Plan shall be subject to approval by the
shareholders of the Company within twelve (12) months before or after
the date the Plan is adopted.
(b) If and in the event that the Company registers any class of equity
securities pursuant to Section 12 of the Exchange Act, any required
approval of the shareholders of the Company obtained after such
registration shall be solicited substantially in accordance with
Section 14(a) of the Exchange Act and the rules and regulations
promulgated thereunder.
(c) If any required approval by the shareholders of the Plan itself or of
any amendment thereto is solicited at any time otherwise than in the
manner described in Section 17(b) hereof, then the Company shall, at or
prior to the first annual meeting of shareholders held subsequent to
the later of (1) the first registration of any class of equity
securities of the Company under Section 12 of the Exchange Act or (2)
the granting of an Option hereunder to an officer or director after
such registration, do the following:
(i) furnish in writing to the holders entitled to vote for the Plan
substantially the same information which would be required (if
proxies to be voted with respect to approval or disapproval of the
Plan or amendment were then being solicited) by the rules and
regulations in effect under Section 14(a) of the Exchange Act at
the time such information is furnished; and
(ii) file with, or mail for filing to, the Securities and Exchange
Commission four copies of the written information referred to in
subsection (i) hereof not later than the date on which such
information is first sent or given to shareholders.
18. Information to Optionees. The Company shall provide to each Optionee, during
the period for which such Optionee has one or more Options outstanding, copies
of all annual reports. The Company shall not be required to provide such
information if the issuance of Options under the Plan is limited to key
employees whose duties in connection with the Company assure their access to
equivalent information.
<PAGE>
Exhibit 10.2c
THIS SECURITY HAS BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO, OR IN
CONNECTION WITH, THE SALE OR DISTRIBUTION THEREOF. NO SUCH SALE OR DISPOSITION
MAY BE EFFECTED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR
AN OPINION OF COUNSEL FOR THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED
UNDER THE SECURITIES ACT OF 1933.
QUALITY SEMICONDUCTOR, INC.
INCENTIVE STOCK OPTION AGREEMENT
QUALITY SEMICONDUCTOR, INC., a California corporation (the "Company"), has
granted to the undersigned ("Optionee"), an option to purchase the number of
shares of Common Stock designated on the Notice of Grant of Stock Options and
Grant Agreement (the "Notice") attached hereto, and in all respects subject to
the terms, definitions, and provisions of the 1989 Stock Option Plan (the
"Plan") adopted by the Company, both of which are incorporated herein by
reference. The terms defined in the Plan shall have the same defined meanings
herein.
1. Nature of the Option. This Option is intended to qualify as an Incentive
Stock Option as defined in Section 422A of the Internal Revenue Code of 1989, as
amended (the "Code").
2. Exercise Price. The exercise price for each share of Common Stock shall
be the option Price designated on the Notice attached hereto, which price is not
less than the fair market value per share of the Common Stock on the date of
grant.
3. Exercise of Option. This Option shall be exercisable during its term in
accordance with the provisions of Section 9 of the Plan as follows:
(i) Right to Exercise.
(a) Subject to subsections 3(i)(b) and (c), below, this option shall
be exercisable as designated on the Notice attached hereto.
(b) This Option may not be exercised for a fraction of a share.
(c) In the event of Optionee's death, disability or other termination
of employment, the exercisability of the Option is governed by
Sections 7, 8 and 9 below.
(ii)Method of Exercise. This Option shall be exercisable by written notice
stating the election to exercise the Option, the number of Shares in
respect of which the Option is being exercised, and such other
representations and agreements as to the holder's investment intent
with respect to such shares of Common Stock as may be required by the
Company pursuant to the provisions of the Plan. Such written notice
shall be signed by the Optionee and shall be delivered in person or by
certified mail to the Secretary of the Company. The written notice
shall be accompanied by payment of the exercise price for the total
number of shares being purchased. This Option shall be deemed to be
exercised upon receipt by the Company of said written notice
accompanied by said exercise price. A form of notice is attached to
this Agreement as Exhibit A and a form of investment representation
letter is attached hereto as Exhibit B for Optionee's convenience.
No Shares shall be issued pursuant to the exercise of an Option unless
such issuance and such exercise comply with all relevant provisions of
law and the requirements of any stock exchange upon which the Shares
may then be listed. Assuming such compliance, the Shares shall be
considered to be transferred to Optionee on the date on which the
Option is exercised with respect to such Shares.
4. Optionee's Representations. By receipt of this option, by its
execution, and by its exercise in whole or
in part, Optionee represents to the Company that he understands that:
(i) both this option, and any Shares purchased upon its exercise, are
securities the issuance by the Company of which requires compliance
with federal and state security laws;
(ii)these securities are made available to him only on the condition that
he makes the representation contained in this section (4) to the
Company;
(iii)he has made a reasonable investigation of the affairs of the Company
sufficient to be well informed as to the rights and the value of these
securities;
(iv)he understands that the securities have not been registered under the
Securities Act of 1933 (the "Act") in reliance upon a specific
exemption contained in that Act which depends upon his bona fide
investment intention in acquiring these securities; that his intention
is to hold these securities for his own benefit for an indefinite
period; that he has no present intention of selling or transferring
any part thereof (recognizing that the option is not transferable) and
that there may be certain restrictions on transfer of the shares
subject to the option;
(v) he understands that the Shares subject to the option, in addition to
other restrictions on transfer, must be held indefinitely unless
subsequently registered under the Act, or unless an exemption from
registration is available; that Rules 144 and 701, the usual
exemptions from registration, are only available (i) after the
satisfaction of certain holding periods, (ii) in the presence of a
public market for the Shares and (iii) in the case of Rule 701, if the
Company satisfies certain conditions and files the necessary
documentation with the Securities and Exchange Commission (the "SEC");
that there is no certainty that a public market for the Shares will
exist, and that otherwise it will be necessary that the Shares be sold
pursuant to another exemption from registration which may be difficult
to satisfy;
(vi)he understands that the certificate representing the Shares will bear a
legend prohibiting their transfer in the absence of their registration
or the opinion of counsel for the Company that registration is not
required, and a legend prohibiting their transfer without the consent
of the Commissioner of Corporations of the State of California; and
(vii)he has read the applicable rules of the Commissioner of Corporations,
which are attached as Exhibit C to this Agreement.
5. Method of Payment. Payment of the exercise price shall be by:
(a) cash; or
(b) check.
6. Restrictions on Exercise. This Option may not be exercised if the issuance of
such Shares upon such exercise or the method of payment of consideration for
such shares would constitute a violation of any applicable federal or state
securities or other law or regulation, including any rule under Part 207 of
Title 12 of the Code of Federal Regulations ("Regulation G"), as promulgated by
the Federal Reserve Board. As a condition to the exercise of this Option, the
Company may require Optionee to make any representation and warranty to the
Company that may be required by any applicable law or regulation.
7. Termination of Status as an Employee. If Optionee ceases to serve as an
Employee, he may, but only within thirty (30) days after the date he ceases to
be an Employee of the Company, exercise this Option to the extent that he was
entitled to exercise it at the date of such termination. To the extent that he
was not entitled to exercise this Option at the date of such termination, or if
he does not exercise this Option within the time specified herein, the Option
shall terminate.
8. Disability of Optionee. Notwithstanding the provisions of Section 7 above, if
Optionee is unable to continue his employment with the Company as a result of
his total and permanent disability (as defined in Section 422A(C) (9) of the
Internal Revenue Code), he may, but only within six (6) months from the date of
termination of employment, exercise his Option to the extent he was entitled to
exercise it at the date of such termination. To the extent that he was not
entitled to exercise the Option at the date of termination, or if he does not
exercise such Option (which he was entitled to exercise) within the time
specified herein, the Option shall terminate.
9. Death of optionee. In the event of the death of Optionee:
<PAGE>
(a) during the term of this Option and while an Employee of the Company and
having been in Continuous Status as an Employee since the date of grant
of this Option, this Option may be exercised, at any time within three
(3) months following the date of death, by Optionee's estate or by a
person who acquired the right to exercise this Option by bequest or
inheritance, but only to the extent of the right to exercise that would
have accrued had Optionee continued living and remained in Continuous
Status as an Employee three (3) months after the date of death; or
(b) within thirty (30) days after the termination of Optionee's Continuous
Status as an Employee, this Option may be exercised, at any time within
three (3) months following the date of death, by Optionee's estate or
by a person who acquired the right to exercise this Option by bequest
or inheritance, but only to the extent of the right to exercise that
had accrued at the date of termination.
10. Non-Transferability of Option. This Option may not be sold, pledged,
assigned, hypothecated, transferred or disposed of in any manner other than by
will or by the laws of descent or distribution and may be exercised during the
lifetime of Optionee only by him. The terms of this Option shall be binding upon
the executors, administrators, heirs, successors, and assigns of Optionee.
11. Right of First Refusal. In the event, at any time after the date of this
Option, the Optionee or his transferee desires to sell or transfer in any manner
the Shares which he has received under this Option, he shall first offer such
Shares for sale to the Company at the same price, and upon the same terms (or
terms as similar as reasonably possible) upon which he is proposing or is to
dispose of said Shares. Said right of first refusal shall be provided to the
Company for a period of thirty (30) days following receipt by the Company of
written notice by the Optionee of the terms and conditions of said proposed sale
or transfer and the name, address and phone number of each proposed buyer of
transferee. If the Company desires to exercise such right of first refusal, it
shall notify Optionee in writing within such thirty day period. In the event the
Shares are not disposed of on such terms within thirty (30) days following lapse
of the period of the right of first refusal provided to the Company or if the
Optionee proposes to change the price or other terms to make them more favorable
to the buyer, they shall once again be subject to the right of first refusal
herein provided.
12. Involuntary Transfer. In the event, at any time after the date of this
Option, of any transfer by operation of law or any other involuntary transfer
(including death or divorce) of all or portion of the Shares by the record
holder thereof, the Company shall have an option to purchase all of the Shares
transferred. Upon such a transfer, the person acquiring the Shares shall
promptly notify the Secretary of the Company of such transfer. The right to
purchase such Shares shall be provided to the Company for a period of thirty
(30) days following receipt by the Company of written notice by the person
acquiring the Shares. With respect to any stock to be transferred pursuant to
this Section 12, the price per Share shall be the price established by the Board
of Directors as the then fair market value of the Shares.
13. Assignment. The right of the Company to purchase any part of the Shares
under Sections 11 or 12 of this Option may be assigned in whole or in part to
any shareholder or shareholders of the Company or other persons or
organizations.
14. Termination of Repurchase and Refusal Rights. The right of first refusal
granted the Company by Section 11 of this Option and the right of repurchase
granted the Company by Section 12 of this Option shall terminate at such time as
a public market exists for the Company's Common Stock (or any other stock issued
to Optionee in exchange for the Shares purchased under this Agreement). For the
purpose of this Agreement, a "Public Market" shall be deemed to exist if (i)
said stock is listed on a national securities exchange (as that term is used in
the Securities Exchange Act of 1934) or (ii) said stock is traded on the
over-the-counter market and prices are published daily on business days in a
recognized financial journal. Notwithstanding the foregoing, Optionee and
Optionee's transferees will not, without the prior written consent of the
Company, offer, sell, contract to sell or grant any option to purchase or
otherwise dispose of any of the Shares for a period of one hundred twenty (120)
days following the effectiveness of a registration statement under the
Securities Act of 1933, as amended, in connection with the Company's initial
public offering of securities.
Upon termination of the right of first refusal imposed by this Option
and the expiration or exercise of the Company's repurchase option described
above, a new certificate or certificates representing the Shares not repurchased
shall be issued, on request, without any legend referring to such right of first
refusal or repurchase options.
15. Exempt Transfers. The restrictions on transfer on the Shares (but not the
restriction on transfer of the unexercised option which is the subject of this
Agreement) under Sections 11 and 12 shall not apply to a transfer to Optionee's
spouse or to a trustee for their benefit, or to Optionee's ancestors or
descendants by descent provided that such transferee shall agree in writing to
take such Shares subject to all the terms of this Agreement, including
restrictions on further transfer.
16. Term of Option. This Option may not be exercised more than ten (10)
years from the date of grant of this Option, any may be exercised during such
term only in accordance with the Plan and the terms of this Option.
17. Early Disposition of Stock. Optionee understands that, if he disposes of any
Shares received under this Option within two (2) years after the date of this
Agreement or within one (1) year after such Shares were transferred to him, then
he will be treated for federal income tax purposes as having received ordinary
income at the time of such disposition in an mount equal to the excess of the
fair market value of the Shares at the time such Shares were delivered to him
over the price paid for the Shares. Optionee hereby agrees to notify the Company
in writing within thirty (30) days after the date of any such disposition.
Optionee understands that, if he disposes of such Shares at any time after the
expiration of such two-year and one-year holding periods, then any gain on such
sale will be taxed at capital gain rates.
<PAGE>
DATE OF GRANT: _____ /_____/9__
QUALITY SEMICONDUCTOR, INC.
A California Corporation
By: STEPHEN H. VONDERACH VICE PRESIDENT
and FINANCE CHIEF FINANCIAL OFFICER
OPTIONEE ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT TO SECTION
3 HEREOF IS EARNED ONLY BY CONTINUING SERVICE AS AN EMPLOYEE OR CONSULTANT AT
THE WILL OF THE COMPANY (NOT THROUGH THE ACT OF BEING HIRED, BEING GRANTED THIS
OPTION OR ACQUIRING SHARES HEREUNDER). OPTIONEE FURTHER ACKNOWLEDGES AND AGREES
THAT NOTHING IN THIS AGREEMENT, NOR IN THE COMPANY'S STOCK OPTION PLAN WHICH IS
INCORPORATED HEREIN BY REFERENCE, SHALL CONFER UPON OPTIONEE ANY RIGHT WITH
RESPECT TO CONTINUATION OF EMPLOYMENT BY THE COMPANY, NOR SHALL IT INTERFERE IN
ANY WAY WITH HIS RIGHT OR THE COMPANY'S RIGHT TO TERMINATE HIS EMPLOYMENT AT ANY
TIME, WITH OR WITHOUT CAUSE.
Optionee acknowledges receipt of a copy of the Plan and certain information
related thereto and represents that he is familiar with the terms and provisions
thereof, and hereby accepts this Option subject to all of the terms and
provisions thereof. Optionee has reviewed the Plan and this Option in their
entirety, has had an opportunity to obtain the advice of counsel prior to
executing this Option and fully understands all provisions of the Option.
Optionee hereby agrees to accept as binding, conclusive and final all decisions
or interpretations of the Board upon any questions arising under the Plan.
(Optionee's signature)
(Optionee's printed name)
<PAGE>
EXHIBIT A
NOTICE OF EXERCISE OF
INCENTIVE STOCK OPTION
Quality Semiconductor, Inc.
851 Martin Ave. Date of
Santa Clara, CA 95050 Exercise:
Re: Incentive Stock Option Grant Dated / /9
Gentlemen:
This constitutes notice under my stock option that I elect to purchase the
number of shares of Quality Semiconductor, Inc. Common Stock set forth below for
the price set forth below:
Option Grant dated: / /9
Number of shares as to which option is exercised:
Total exercise price:
Cash payment delivered herewith:
Unless such documents are enclosed herewith, I hereby agree to execute such
additional documents as may be required pursuant to subparagraph 9(a) of the
1989 Stock Option Plan. Please advise what additional documents may be required.
Very truly yours,
(Optionee's signature)
(Optionee's printed name)
<PAGE>
LEASE ADDENDUM Exhibit 10.14
Landlord: James S. Lindsey
Tenant: Quality Semiconductor, Inc.
Premises: 851 Martin Avenue, Santa Clara, CA 95050
WHEREAS
1. Tenant and Landlord's predecessor, Prudential Insurance Company of America,
executed a lease (hereinafter "the Lease") dated for reference purposes December
12, 1990, covering the Premises.
2. The Lease expires, by its terms, or March 10, 1998.
3. Landlord and Tenant wish to amend the Lease, and extend the Lease to
expire on March 10, 2001.
March 1, 1998 $55,967.74
April 1, 1998 thru August 1, 1999 $60,000.00
September 1, 1999 $62,666.66
October 1, 1999 thru February 1, 2001 $64,000.00
March 1, 2001 $20,645.16
4. Landlord shall credit the sum of $75,000.00 against the rent due for
September and October, 1997. Tenant shall, before July 1, 1998, expend such sum
or more on improvements to the Premises, from the following list:
o repair of plumbing systems o repair of water damage to floor and walls o
electrical repairs o replacement of carpeting o painting of interior walls
Tenant shall submit paid bills proving said expenditures on or before July
1, 1998. If less than $75,000.00 is spent by Tenant prior to July 1, 1998, then
the difference between the sum spend and $75,000.00 shall be paid to Landlord on
July 1, 1998.
5. Tenant shall have the benefit of the option described on paragraph 41 of the
Lease except that the Term (paragraph 41(a) shall be three (3) years and the
Base rent shall be adjusted (paragraph 41c(i) at the beginning of month 18 by
one plus the percentage change in the Consumer's Price Index for the urban
consumers, all items for the San Francisco-Oakland-San Jose Metropolitan area
from the first day of the Extension Term to the beginning of month eighteen (18)
of the Extension Term.
Dated: July 22, 1997
Landlord: /s/ James S. Lindsey Tenant: Quality Semiconductor, Inc.
James S. Lindsey
By: /s/ R. Paul Gupta
R. Paul Gupta
Its: President and CEO
<PAGE>
Exhibit 10.15
FOURTH AMENDMENT TO CREDIT AGREEMENT
THIS FOURTH AMENDMENT TO CREDIT AGREEMENT ("Amendment"), dated as of
June 25, 1997, effective as of May 30, 1997, is entered into by and between
QUALITY SEMICONDUCTOR, INC. (the "Borrower") and BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION (the "Bank").
RECITALS
A. The Borrower and the Bank are parties to a Credit Agreement dated as of
March 22, 1996, as amended by a Waiver and First Amendment to Credit Agreement
dated as of July 31, 1996, and a Waiver and Second Amendment to Credit Agreement
dated as of November 27, 1996, and a Third Amendment to Credit Agreement dated
as of March 4, 1997, effective as of February 28, 1997 (as so amended, the
"Credit Agreement") pursuant to which the Bank has extended certain credit
facilities to the Borrower and certain of its Subsidiaries.
B. The Borrower has requested that the Bank agree to certain amendments to
the Credit Agreement.
C. The Bank is willing to amend the Credit Agreement, subject to the terms
and conditions of this Amendment.
NOW, THEREFORE, for valuable consideration, the receipt and adequacy of which
are hereby acknowledged, the parties hereto hereby agree as follows:
1. Defined Terms. Unless otherwise defined herein, capitalized terms used
herein shall have the meanings, if any, assigned to them in the Credit
Agreement.
2. Amendments to Credit Agreement.
(a) Section 1.01 of the Credit Agreement shall be amended at the
defined term "Availability Period" by amending and restating such
defined term in its entirety as follows:
"'Availability Period': the period commencing on the date of this Agreement
and ending on the date that is the earliest to occur of (i) June 30, 1998, or
(ii) the date on which the Bank's commitment to extend credit hereunder
terminates."
(b) Section 1.01 of the Credit Agreement shall be amended at the
defined term "Final Maturity Date" by amending and restating such
defined term in its entirety as follows:
"'Final Maturity Date': (a) in respect of any Advances, June 30, 1998; and
(b) in respect of any standby or commercial letters of credit, September 30,
1998."
(c) Subsection 2.02 (a) of the Credit Agreement shall be amended and
restated in its entirety so as to read as follows:
"(a)Subject to the other provisions of this Section, Dollar
Advances under the Revolving Facility shall bear interest at
a rate per annum equal to the Reference Rate plus 0.25%
percentage points per annum (the Reference Rate plus 0.25%
percentage points per annum is referred to herein as the
"Floating Rate"). The Borrower shall, or shall cause the
applicable Acceptable Subsidiary to, pay interest quarterly,
on the last day of each calendar quarter until the last day
of the Availability Period, on which date all accrued and
unpaid interest shall be due and payable. The Borrower shall
repay or cause the applicable Acceptable Subsidiary to repay
the principal amount of each Reference Rate Advance on the
date such advance is converted into an Offshore Rate Advance
under subsection (b) below and on the last day of the
Availability Period."
(d) Clause (ii) of subsection 2.02 (b) of the Credit Agreement shall
be amended and restated in its entirety so as to read as follows:
"(ii) The Borrower shall pay or shall cause the applicable
Acceptable Subsidiary to pay interest on each Offshore Rate
Advance on the last day of the Offshore Rate Interest Period
for such Advance; provided, however, that if any Interest
Period for a Offshore Rate Advance exceeds three months,
interest shall also be payable on the date which falls three
months after the beginning of such Interest Period and on
each date which falls three months after any such interest
payment date. The Borrower shall repay or shall cause the
applicable Acceptable Subsidiary to repay the principal
balance of each Offshore Rate Advance on the last day of the
Offshore Rate Interest Period for such Advance, and (if
sooner occurring) on the last day of the Availability
Period."
(e) Section 7.09 of the Credit Agreement shall be amended and restated
in its entirety so as to read as follows:
"7.09 Tangible Net Worth. The Borrower shall not permit, at any
time, its consolidated Tangible Net Worth to be less than
$35,000,000."
(f) Schedule 2 to the Compliance Certificate shall be amended and
restated in its entirety so as to read as set forth in Schedule 2
attached hereto.
3. Representations and Warranties. The Borrower hereby represents and
warrants to the Bank as follows:
(a) No Default or Event of Default has occurred and is continuing.
(b) The execution, delivery and performance by the Borrower of this
Amendment has been duly authorized by all necessary corporate and
other action and do not and will not require any registration
with, consent or approval of, - notice to or action by, any person
(including any governmental authority) in order to be effective
and enforceable. The Credit Agreement as amended by this Amendment
constitutes the legal, valid and binding obligations of the
Borrower, enforceable against it in accordance with its respective
terms, without defense, counterclaim or offset.
(c) All representations and warranties of the Borrower contained in
the Credit Agreement are true and correct.
(d) The Borrower is entering into this Amendment on the basis of its
own investigation and for its own reasons, without reliance upon
the Bank or any other person.
<PAGE>
4. Effective Date: Post-Closing Deliveries.
(a) This Amendment will become effective as of May 30, 1997; provided
that on or before June 30, 1997, the Bank has received from the
Borrower a duly executed original (or, if elected by the Bank, an
executed facsimile copy) of this Amendment.
(b) The Borrower covenants to deliver to the Bank (i) on or before
July 15, 1997, a current incumbency certificate, and (ii) on or
before August 30, 1997, a copy of a resolution passed by the board
of directors of the Borrower, certified by the Secretary or an
Assistant Secretary of the Borrower as being in full force and
effect on the date of such certification, authorizing the
execution, delivery and performance of this Amendment.
5. Reservation of Rights. The Borrower acknowledges and agrees that the
execution and delivery by the Bank of this Amendment shall not be
deemed to create a course of dealing or otherwise obligate the Bank to
execute similar amendments under the same or similar circumstances in
the future.
6. Miscellaneous.
(a) Except as herein expressly amended, all terms, covenants and provisions
of the Credit Agreement are and shall remain in full force and effect and all
references therein or in the other Credit Documents to such Credit Agreement
shall henceforth refer to the Credit Agreement as amended by this Amendment.
This Amendment shall be deemed incorporated into, and a part of, the Credit
Agreement.
(b) This Amendment shall be binding upon and inure to the benefit of the
parties hereto and thereto and their respective successors and assigns. No third
party beneficiaries are intended in connection with this Amendment.
(c) This Amendment shall be governed by and construed in accordance with
the law of the State of California.
(d) This Amendment may be executed in any number of counterparts, each of
which shall be deemed an original, but all such counterparts together shall
constitute but one and the same instrument. Each of the parties hereto
understands and agrees that this document (and any other document required
herein) may be delivered by any party thereto either in the form of an executed
original or an executed original sent by facsimile transmission to be followed
promptly by mailing of a hard copy original, and that receipt by the Bank of a
facsimile transmitted document purportedly bearing the signature of the Borrower
shall bind the Borrower, with the same force and effect as the delivery of a
hard copy original. Any failure by the Bank to receive the hard copy executed
original of such document shall not diminish the binding effect of receipt of
the facsimile transmitted executed original of such document which hard copy
page was not received by the Bank.
(e) This Amendment, together with the Credit Agreement, contains the entire
and exclusive agreement of the parties hereto with reference to the matters
discussed herein and therein. This Amendment supersedes all prior drafts and
communications with respect thereto. This Amendment may be amended or modified
only in writing, signed by the Borrower and the Bank.
(f) If any term or provision of this Amendment shall be deemed prohibited
by or invalid under any applicable law, such provision shall be invalidated
without affecting the remaining provisions of this Amendment or the Credit
Agreement, respectively.
(g) The Borrower covenants to pay to or reimburse the Bank, upon demand,
for all costs and expenses (including allocated costs of in-house counsel)
incurred in connection with the development, preparation, negotiation, execution
and delivery of this Amendment.
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Amendment as of the date first above written.
QUALITY SEMICONDUCTOR, INC.
By: /s/ John P. Goldsberry
Title: Vice President - Finance
and Chief Financial Officer
BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION
By: /s/ Debra G. Staiger
Title: Vice President
<PAGE>
Date: _______________, 199__
For the fiscal quartr/year
ended _______________, 199__
SCHEDULE 2
to Compliance Certificate
($ in 000s)1/
Actual Required/Permitted
1. Section 7.03
Dividends (Stock Repurchases).
Repurchase of common stock Not to exceed
since the date of the $1,300,000 in
Agreement the aggregate
2. Section 7.09
Minimum Tangible Net Worth.
Tangible Net Worth:
(i) Total Assets
less
(ii) goodwill, patents, trademarks, trade names, organization expense,
treasury shares, unamortized debt discount and premium, deferred
charges and other like intangibles
less
(iii) all liabilities (including
accrued and deferred
income taxes and
subordinated liabilities)
(i) - (ii) - (iii) = Not less than $35,000,000
<PAGE>
Actual Required/Permitted
3. Section 7.10 Quick Ratio.
the ratio of:
A. the sum of:
(i) cash
plus
(ii)short-term cash
investments
plus
(iii) current net accounts
receivable
= (i) + (ii) + (iii) =
B. current net liabilities
A
B = Not less than 1.15 to 1.00
4. Section 7.11
Leverage Ratio.
the ratio of:
A. total liabilities
B. Tangible Net Worth
(from 2 above)
A
B = Not greater than 0.85 to 1.00
<PAGE>
Actual Required/Permitted
5. Section 7.12(a)
Losses in Two Consecutive
Quarters.
A. (i) Operating loss for
fiscal quarter just Not to exceed 0 if
ended (ii) shows a loss.
(ii)Operating loss for the
fiscal quarter
immediately preceding
the fiscal quarter just
ended
B. (i) Net loss for fiscal Not to exceed 0 if (ii) shows
quarter just ended a loss.
(ii)Net loss for the
fiscal quarter
immediately preceding
the fiscal quarter just
ended
6. Section 7.12(b) Losses in
One Quarter.
Operating loss for fiscal quarter Not to exceed 5% of Tangible
just ended Net Worth as of immediately
preceding fiscal quarter:
Tangible Net Worth
from last quarter's
Compliance
Certificate
Item No. 2
x 5%
=
Net loss for fiscal quarter Not to exceed 5% of Tangible
just ended Net Worth as of immediately
preceding fiscal quarter as
computed above:
<PAGE>
Exhibit 10.16
CHANGE OF CONTROL AGREEMENT
This Change of Control Agreement (the "Agreement") is made and entered
into effective as of August 28, 1997, by and among the directors signing this
Agreement (each a "Director" and, collectively, the "Directors") and Quality
Semiconductor, Inc., a California corporation (the "Company").
RECITALS
A. It is expected that another company or other entity may from time to
time consider the possibility of acquiring the Company or that a change in
control may otherwise occur, with or without the approval of the Company's Board
of Directors (the "Board"). The Board recognizes that such consideration can be
a distraction to a Director and can cause the Director to consider alternative
opportunities. The Board has determined that it is in the best interests of the
Company and its shareholders to assure that the Company will have the continued
dedication and objectivity of the Directors, notwithstanding the possibility,
threat or occurrence of a Change of Control (as defined below) of the Company.
B. The Board believes that it is in the best interests of the Company and
its shareholders to provide each of the Directors with an incentive to continue
his or her engagement with the Company.
C. The Board believes that it is imperative to provide the Directors with
certain benefits upon a Change of Control, which benefits are intended to
provide the Directors with financial security and provide sufficient income and
encouragement to the Directors to remain with the Company notwithstanding the
possibility of a Change of Control.
D. To accomplish the foregoing objectives, the Company, upon execution of
this Agreement by the parties, will agree to the terms provided in this
Agreement.
E. Certain capitalized terms used in the Agreement are defined in Section 3
below.
In consideration of the mutual covenants herein contained, and in
consideration of the continuing engagement of Director by the Company, the
parties agree as follows:
1. Restricted Stock and Stock Options. Subject to Section 5 below, in the
event of a Change of Control and regardless of whether a Director's engagement
with the Company is terminated in connection with the Change of Control, the
vesting schedule for each unvested share of Common Stock or option to purchase
Common Stock held by a Director (collectively referred to as the "Shares") shall
be accelerated by two (2) years. Thereafter, so long as Director remains engaged
by the Company (or a successor corporation) as a Director, employee or
consultant, the remaining Shares that have not otherwise vested as of the Change
of Control shall vest over the remaining vesting term applicable to the Shares.
Each stock option shall be exercisable to the extent so vested in accordance
with the provisions of the option agreement and Plan pursuant to which such
option was granted and each Share of restricted stock shall be freely
transferable to the extent so vested in accordance with the provisions of the
agreement pursuant to which such stock was purchased by Director.
2. Change of Control. In the event a Director's engagement terminates for
any reason prior to the occurrence of a Change of Control, then the Director
shall not be entitled to acceleration of vesting under this Agreement. The
Director's benefits will be terminated under the Company's then existing benefit
plans and policies in accordance with such plans and policies in effect on the
date of termination or as otherwise determined by the Board of Directors of the
Company.
3. Definition of Terms. The following terms referred to in this Agreement
shall have the following meanings:
(a) Change of Control. "Change of Control" shall mean the occurrence of any
of the following events:
(i) Ownership. Any "Person" (as such term is used in Sections 13(d) and
14(d) of the Securities Exchange Act of 1934, as amended) is or becomes the
"Beneficial Owner" (as defined in Rule 13d-3 under said Act), directly or
indirectly, of securities of the Company representing fifty-one percent (51%) or
more of the total voting power represented by the Company's then outstanding
voting securities without the approval of the Board of Directors of the Company;
(ii) Merger/Sale of Assets. A merger or consolidation of the Company
whether or not approved by the Board of Directors of the Company, other than a
merger or consolidation which would result in the voting securities of the
Company outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting securities of the
surviving entity) at least fifty percent (50%) of the total voting power
represented by the voting securities of the Company or such surviving entity
outstanding immediately after such merger or consolidation;
(iii) Sale of Assets; Liquidation. An agreement for the sale or disposition
by the Company of all or substantially all of the Company's assets or the
shareholders of the Company approve a plan of complete liquidation of the
Company in connection with an agreement for the sale or disposition by the
Company of all or substantially all of the Company's assets; or
(iv) Change in Board Composition. A change in the composition of the Board
of Directors of the Company, as a result of which fewer than a majority of the
directors are Incumbent Directors. "Incumbent Directors" shall mean directors
who either (A) are directors of the Company as of the date of this Agreement or
(B) are elected, or nominated for election, to the Board of Directors of the
Company with the affirmative votes of at least a majority of the Incumbent
Directors at the time of such election or nomination (but shall not include an
individual whose election or nomination is in connection with an actual or
threatened proxy contest relating to the election of directors to the Company).
4. Tax Liability on Payments. To the extent that any of the payments or
benefits provided for in this Agreement to a Director constitute "parachute
payments" within the meaning of Section 280G of the Internal Revenue Code of
1986, as amended (the "Code") and would be subject to the excise tax imposed by
Section 4999 of the Code, the Company will pay the Director an amount equal to
such excise tax; provided, however, that the Director will be responsible for
paying any and all income taxes owed by him or her as a result of receipt of
such payment from the Company and the Company will not be further obligated to
gross up Director's payments and/or benefits to offset such income tax
obligation.
5. Certain Business Combinations. In the event it is determined by the
Board, upon receipt of a written opinion of the Company's independent auditors,
that the enforcement of any agreement between a Director and the Company which
allows for the acceleration of vesting of stock and/or stock options granted for
the Company's securities upon the effective date of a Change of Control, would
preclude accounting for any proposed business combination of the Company
involving a Change of Control as a pooling of interests, and the Board otherwise
desires to approve such a proposed business transaction which requires as a
condition to the closing of such transaction that it be accounted for as a
pooling of interests, then any such Section of this Agreement shall be null and
void. For purposes of this Section 5, the Board's determination shall require
the unanimous approval of the non-employee Board members.
6. Successors. Any successor to the Company (whether direct or indirect and
whether by purchase, lease, merger, consolidation, liquidation or otherwise) to
all or substantially all of the Company's business and/or assets shall assume
the obligations under this Agreement and agree expressly to perform the
obligations under this Agreement in the same manner and to the same extent as
the Company would be required to perform such obligations in the absence of a
succession. The terms of this Agreement and all of the Directors' rights
hereunder shall inure to the benefit of, and be enforceable by, a Director's
personal or legal representatives, executors, administrators, successors, heirs,
distributees, devisees and legatees.
7. Notice. Notices and all other communications contemplated by this
Agreement shall be in writing and shall be deemed to have been duly given when
personally delivered or when mailed by U.S. registered or certified mail, return
receipt requested and postage prepaid. Mailed notices to a Director shall be
addressed to the Director at the home address which the Director most recently
communicated to the Company in writing. In the case of the Company, mailed
notices shall be addressed to its corporate headquarters, and all notices shall
be directed to the attention of its Secretary.
8. Miscellaneous Provisions.
(a) No Duty to Mitigate. The Directors shall not be required to mitigate
the amount of any payment contemplated by this Agreement, nor, except as
otherwise provided in this Agreement, shall any such payment be reduced by any
earnings that the Directors may receive from any other source.
(b) Waiver. No provision of this Agreement shall be modified, waived or
discharged as to a Director unless the modification, waiver or discharge is
agreed to in writing and signed by the Director and by an authorized officer of
the Company (other than the Director). No waiver by either party of any breach
of, or of compliance with, any condition or provision of this Agreement by the
other party shall be considered a waiver of any other condition or provision or
of the same condition or provision at another time.
(c) Whole Agreement. No agreements, representations or understandings
(whether oral or written and whether express or implied) which are not expressly
set forth in this Agreement have been made or entered into by either party with
respect to the subject matter hereof. This Agreement supersedes any agreement of
the same title and concerning similar subject matter dated prior to the date of
this Agreement, and by execution of this Agreement both parties agree that any
such predecessor agreement shall be deemed null and void.
(d) Choice of Law. The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of the State of
California without reference to conflict of laws provisions.
(e) Severability. If any term or provision of this Agreement or the
application thereof to any circumstance shall, in any jurisdiction and to any
extent, be invalid or unenforceable, such term or provision shall be ineffective
as to such jurisdiction to the extent of such invalidity or unenforceability
without invalidating or rendering unenforceable the remaining terms and
provisions of this Agreement or the application of such terms and provisions to
circumstances other than those as to which it is held invalid or unenforceable,
and a suitable and equitable term or provision shall be substituted therefor to
carry out, insofar as may be valid and enforceable, the intent and purpose of
the invalid or unenforceable term or provision.
(f) Arbitration. Any dispute or controversy arising under or in connection
with this Agreement may be settled at the option of either party by binding
arbitration in the County of Santa Clara, California, in accordance with the
rules of the American Arbitration Association then in effect. Judgment may be
entered on the arbitrator's award in any court having jurisdiction. Punitive
damages shall not be awarded.
(g) Legal Fees and Expenses. The parties shall each bear their own
expenses, legal fees and other fees incurred in connection with this Agreement.
(h) No Assignment of Benefits. The rights of any person to payments or
benefits under this Agreement shall not be made subject to option or assignment,
either by voluntary or involuntary assignment or by operation of law, including
(without limitation) bankruptcy, garnishment, attachment or other creditor's
process, and any action in violation of this subsection (h) shall be void.
(i) Employment Taxes. All payments made pursuant to this Agreement will be
subject to withholding of applicable income and employment taxes.
(j) Assignment by Company. The Company may assign its rights under this
Agreement to an affiliate, and an affiliate may assign its rights under this
Agreement to another affiliate of the Company or to the Company; provided,
however, that no assignment shall be made if the net worth of the assignee is
less than the net worth of the Company at the time of assignment. In the case of
any such assignment, the term "Company" when used in a section of this Agreement
shall mean the corporation that actually has engaged the Director.
(k) Counterparts. This Agreement may be executed in counterparts, each of
which shall be deemed an original, but all of which together will constitute one
and the same instrument.
IN WITNESS WHEREOF, each of the parties has executed this Agreement, in the
case of the Company by its duly authorized officer, as of the day and year first
above written.
QUALITY SEMICONDUCTOR, INC. DIRECTOR
By:
Title:
<PAGE>
Exhibit 10.17
CHANGE OF CONTROL AGREEMENT
This Change of Control Agreement (the "Agreement") is made and entered
into effective as of August 28, 1997, by and between R. Paul Gupta ("Employee")
and Quality Semiconductor, Inc., a California corporation (the "Company").
RECITALS
A. It is expected that another company or other entity may from time to
time consider the possibility of acquiring the Company or that a change in
control may otherwise occur, with or without the approval of the Company's Board
of Directors (the "Board"). The Board recognizes that such consideration can be
a distraction to the Employee and can cause the Employee to consider alternative
employment opportunities. The Board has determined that it is in the best
interests of the Company and its shareholders to assure that the Company will
have the continued dedication and objectivity of the Employee, notwithstanding
the possibility, threat or occurrence of a Change of Control (as defined below)
of the Company.
B. The Board believes that it is in the best interests of the Company and
its shareholders to provide the Employee with an incentive to continue his or
her employment with the Company.
C. The Board believes that it is imperative to provide the Employee with
certain benefits upon a Change of Control and, under certain circumstances, upon
termination of the Employee's employment in connection with a Change of Control,
which benefits are intended to provide the Employee with financial security and
provide sufficient income and encouragement to the Employee to remain with the
Company notwithstanding the possibility of a Change of Control.
D. To accomplish the foregoing objectives, the Board of Directors has
directed the Company, upon execution of this Agreement by the Employee, to agree
toithe terms provided in this Agreement.
E. Certain capitalized terms used in the Agreement are defined in Section 4
below.
In consideration of the mutual covenants herein contained, and in
consideration of the continuing employment of Employee by the Company, the
parties agree as follows:
1. At-Will Employment. The Company and the Employee acknowledge that the
Employee's employment is and shall continue to be at-will, as defined under
applicable law. If the Employee's employment terminates for any reason,
including (without limitation) any termination prior to a Change of Control, the
Employee shall not be entitled to any payments, benefits, damages, awards or
compensation other than as provided by this Agreement, the terms of certain
Board resolutions and agreements issued to the Employee with respect to the
grant of stock options for the Company's securities (as described in Section 2
below) and the Company's established employee plans and written policies at the
time of termination. The terms of this Agreement shall terminate upon the date
that all obligations of the parties hereunder have been satisfied. A termination
of the terms of this Agreement pursuant to the preceding sentence shall be
effective for all purposes, except that such termination shall not affect the
payment or provision of compensation or benefits on account of a termination of
employment occurring prior to the termination of the terms of this Agreement.
2. Restricted Stock and Stock Options. Subject to Section 6 below, in the
event of a Change of Control and regardless of whether the Employee's employment
with the Company is terminated in connection with the Change of Control, the
vesting schedule for each unvested share of Common Stock or option to purchase
Common Stock held by the Employee (collectively referred to as the "Shares")
shall be accelerated by two (2) years. Thereafter, so long as Employee remains
employed by the Company (or a successor Corporation), the remaining Shares that
have not otherwise vested as of the Change of Control shall vest over the
remaining vesting term applicable to the Shares. Each stock option shall be
exercisable to the extent so vested in accordance with the provisions of the
option agreement and Plan pursuant to which such option was granted and each
share of restricted stock shall be freely transferable to the extent so vested
in accordance with the provisions of the agreement pursuant to which such stock
was purchased by Employee. 3. Change of Control.
(a) Termination Following A Change of Control. If the Employee's employment
with the Company is terminated at any time within one (1) year after a Change of
Control, then the Employee shall be entitled to receive severance benefits as
follows:
(i) Voluntary Resignation. If the Employee voluntarily resigns from the
Company (other than as an Involuntary Termination (as defined below) or if the
Company terminates the Employee's employment for Cause (as defined below)), then
the Employee shall not be entitled to receive severance payments. The Employee's
benefits will be terminated under the Company's then existing benefit plans and
policies in accordance with such plans and policies in effect on the date of
termination or as otherwise determined by the Board of Directors of the Company.
(ii) Involuntary Termination. If the Employee's employment is terminated as
a result of an Involuntary Termination other than for Cause, the Employee shall
be entitled to receive the following benefits: (i) a lump sum severance payment
consisting of (a) eighteen (18) months (the "Severance Period") of the monthly
salary which the Employee was receiving immediately prior to the Change of
Control and (b) the Employee's "target bonus" prorated over the Severance
Period, with such severance payment being made on the termination date; (ii) a
prorated amount of the Employee's "target bonus" for the fiscal year in which
the termination occurs (or for the prior fiscal year if a target bonus has not
yet been determined for the fiscal year in which the termination occurs),
calculated based on the number of months during such fiscal year in which the
Employee was employed by the Company (or a successor corporation), with such
payment being made on the termination date; (iii) continuation of all benefits
through the end of the Severance Period substantially identical to those to
which the Employee was entitled immediately prior to the Change of Control; and
(iv) out-placement services with a total value not to exceed $15,000. For
purposes of this Agreement, the term "target bonus" shall mean that percentage
of the Employee's base salary that is prescribed by the Company under its
Management Bonus Program as the percentage of such base salary payable to the
Employee as a bonus if the Company pays bonuses at one-hundred percent (100%) of
its operating plan.
(iii) Involuntary Termination for Cause. If the Employee's employment is
terminated for Cause, then the Employee shall not be entitled to receive
severance payments. The Employee's benefits will be terminated under the
Company's then existing benefit plans and policies in accordance with such plans
and policies in effect on the date of termination.
(b) Termination Apart from Change of Control. In the event the Employee's
employment terminates for any reason, either prior to the occurrence of a Change
of Control or after the one year period following the effective date of a Change
of Control, then the Employee shall not be entitled to receive any severance
payments under this Agreement. The Employee's benefits will be terminated under
the Company's then existing benefit plans and policies in accordance with such
plans and policies in effect on the date of termination or as otherwise
determined by the Board of Directors of the Company.
4. Definition of Terms. The following terms referred to in this Agreement
shall have the following meanings:
(a) Change of Control. "Change of Control" shall mean the occurrence of any
of the following events:
(i) Ownership. Any "Person" (as such term is used in Sections 13(d) and
14(d) of the Securities Exchange Act of 1934, as amended) is or becomes the
"Beneficial Owner" (as defined in Rule 13d-3 under said Act), directly or
indirectly, of securities of the Company representing fifty-one percent (51%) or
more of the total voting power represented by the Company's then outstanding
voting securities without the approval of the Board of Directors of the Company;
(ii) Merger/Sale of Assets. A merger or consolidation of the Company
whether or not approved by the Board of Directors of the Company, other than a
merger or consolidation which would result in the voting securities of the
Company outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting securities of the
surviving entity) at least fifty percent (50%) of the total voting power
represented by the voting securities of the Company or such surviving entity
outstanding immediately after such merger or consolidation;
(iii) Sale of Assets; Liquidation. An agreement for the sale or disposition
by the Company of all or substantially all of the Company's assets or the
shareholders of the Company approve a plan of complete liquidation of the
Company in connection with an agreement for the sale or disposition by the
Company of all or substantially all of the Company's assets; or
(iv) Change in Board Composition. A change in the composition of the Board
of Directors of the Company, as a result of which fewer than a majority of the
directors are Incumbent Directors. "Incumbent Directors" shall mean directors
who either (A) are directors of the Company as of the date of this Agreement or
(B) are elected, or nominated for election, to the Board of Directors of the
Company with the affirmative votes of at least a majority of the Incumbent
Directors at the time of such election or nomination (but shall not include an
individual whose election or nomination is in connection with an actual or
threatened proxy contest relating to the election of directors to the Company).
(b) Cause. "Cause" shall mean (i) gross negligence or willful misconduct in
the performance of the Employee's duties to the Company where such gross
negligence or willful misconduct has resulted or is likely to result in
substantial and material damage to the Company or its subsidiaries, (ii)
repeated unexplained or unjustified absence from the Company, (iii) a material
and willful violation of any federal or state law; (iv) commission of any act of
fraud with respect to the Company; or (v) conviction of a felony or a crime
involving moral turpitude causing material harm to the standing and reputation
of the Company, in each case as determined in good faith by the Board of
Directors of the Company.
(c) Involuntary Termination. "Involuntary Termination" shall include any
termination by the Company other than for Cause and the Employee's voluntary
termination, upon 30 days prior written notice to the Company, following (i) a
material reduction or change in job duties, responsibilities and requirements
inconsistent with the Employee's position with the Company and the Employee's
prior duties, responsibilities and requirements; (ii) any reduction of the
Employee's base compensation or target bonus (other than in connection with a
general decrease for most officers of the successor corporation); or (iii) the
Employee's refusal to relocate to a facility or location more than 50 miles from
the Company's current location.
5. Tax Liability on Payments. To the extent that any of the payments or
benefits provided for in this Agreement to an Employee constitute "parachute
payments" within the meaning of Section 280G of the Internal Revenue Code of
1986, as amended (the "Code") and would be subject to the excise tax imposed by
Section 4999 of the Code, the Company will pay the Employee an amount equal to
such excise tax; provided, however, that the Employee will be responsible for
paying any and all income taxes owed by him or her as a result of receipt of
such payment from the Company and the Company will not be further obligated to
gross up Employee's payments and/or benefits to offset such income tax
obligation. 6. Certain Business Combinations. In the event it is determined by
the Board, upon receipt of a written opinion of the Company's independent
auditors, that the enforcement of any agreement between the Employee and the
Company which allows for the acceleration of vesting of stock and/or stock
options granted for the Company's securities upon the effective date of a Change
of Control, would preclude accounting for any proposed business combination of
the Company involving a Change of Control as a pooling of interests, and the
Board otherwise desires to approve such a proposed business transaction which
requires as a condition to the closing of such transaction that it be accounted
for as a pooling of interests, then any such Section of this Agreement shall be
null and void. For purposes of this Section 6, the Board's determination shall
require the unanimous approval of the non-employee Board members. 7. Successors.
Any successor to the Company (whether direct or indirect and whether by
purchase, lease, merger, consolidation, liquidation or otherwise) to all or
substantially all of the Company's business and/or assets shall assume the
obligations under this Agreement and agree expressly to perform the obligations
under this Agreement in the same manner and to the same extent as the Company
would be required to perform such obligations in the absence of a succession.
The terms of this Agreement and all of the Employee's rights hereunder shall
inure to the benefit of, and be enforceable by, the Employee's personal or legal
representatives, executors, administrators, successors, heirs, distributees,
devisees and legatees.
8. Notice. Notices and all other communications contemplated by this
Agreement shall be in writing and shall be deemed to have been duly given when
personally delivered or when mailed by U.S. registered or certified mail, return
receipt requested and postage prepaid. Mailed notices to the Employee shall be
addressed to the Employee at the home address which the Employee most recently
communicated to the Company in writing. In the case of the Company, mailed
notices shall be addressed to its corporate headquarters, and all notices shall
be directed to the attention of its Secretary.
9. Miscellaneous Provisions.
(a) No Duty to Mitigate. The Employee shall not be required to mitigate the
amount of any payment contemplated by this Agreement (whether by seeking new
employment or in any other manner), nor, except as otherwise provided in this
Agreement, shall any such payment be reduced by any earnings that the Employee
may receive from any other source.
(b) Waiver. No provision of this Agreement shall be modified, waived or
discharged unless the modification, waiver or discharge is agreed to in writing
and signed by the Employee and by an authorized officer of the Company (other
than the Employee). No waiver by either party of any breach of, or of compliance
with, any condition or provision of this Agreement by the other party shall be
considered a waiver of any other condition or provision or of the same condition
or provision at another time.
(c) Whole Agreement. No agreements, representations or understandings
(whether oral or written and whether express or implied) which are not expressly
set forth in this Agreement have been made or entered into by either party with
respect to the subject matter hereof. This Agreement supersedes any agreement of
the same title and concerning similar subject matter dated prior to the date of
this Agreement, and by execution of this Agreement both parties agree that any
such predecessor agreement shall be deemed null and void.
(d) Choice of Law. The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of the State of
California without reference to conflict of laws provisions.
(e) Severability. If any term or provision of this Agreement or the
application thereof to any circumstance shall, in any jurisdiction and to any
extent, be invalid or unenforceable, such term or provision shall be ineffective
as to such jurisdiction to the extent of such invalidity or unenforceability
without invalidating or rendering unenforceable the remaining terms and
provisions of this Agreement or the application of such terms and provisions to
circumstances other than those as to which it is held invalid or unenforceable,
and a suitable and equitable term or provision shall be substituted therefor to
carry out, insofar as may be valid and enforceable, the intent and purpose of
the invalid or unenforceable term or provision.
(f) Arbitration. Any dispute or controversy arising under or in connection
with this Agreement may be settled at the option of either party by binding
arbitration in the County of Santa Clara, California, in accordance with the
rules of the American Arbitration Association then in effect. Judgment may be
entered on the arbitrator's award in any court having jurisdiction. Punitive
damages shall not be awarded.
(g) Legal Fees and Expenses. The parties shall each bear their own
expenses, legal fees and other fees incurred in connection with this Agreement.
(h) No Assignment of Benefits. The rights of any person to payments or
benefits under this Agreement shall not be made subject to option or assignment,
either by voluntary or involuntary assignment or by operation of law, including
(without limitation) bankruptcy, garnishment, attachment or other creditor's
process, and any action in violation of this subsection (h) shall be void.
(i) Employment Taxes. All payments made pursuant to this Agreement will be
subject to withholding of applicable income and employment taxes.
(j) Assignment by Company. The Company may assign its rights under this
Agreement to an affiliate, and an affiliate may assign its rights under this
Agreement to another affiliate of the Company or to the Company; provided,
however, that no assignment shall be made if the net worth of the assignee is
less than the net worth of the Company at the time of assignment. In the case of
any such assignment, the term "Company" when used in a section of this Agreement
shall mean the corporation that actually employs the Employee.
(k) Counterparts. This Agreement may be executed in counterparts, each of
which shall be deemed an original, but all of which together will constitute one
and the same instrument.
IN WITNESS WHEREOF, each of the parties has executed this Agreement, in
the case of the Company by its duly authorized officer, as of the day and year
first above written.
QUALITY SEMICONDUCTOR, INC. EMPLOYEE
By:
R. Paul Gupta
Title:
<PAGE>
Exhibit 10.18
CHANGE OF CONTROL AGREEMENT
This Change of Control Agreement (the "Agreement") is made and entered
into effective as of August 28, 1997, by and among the employees signing this
Agreement (each an "Employee and, collectively, the "Employees") and Quality
Semiconductor, Inc., a California corporation (the "Company").
RECITALS
A. It is expected that another company or other entity may from time to
time consider the possibility of acquiring the Company or that a change in
control may otherwise occur, with or without the approval of the Company's Board
of Directors (the "Board"). The Board recognizes that such consideration can be
a distraction to the Employees and can cause the Employees to consider
alternative employment opportunities. The Board has determined that it is in the
best interests of the Company and its shareholders to assure that the Company
will have the continued dedication and objectivity of up to twelve key
Employees, notwithstanding the possibility, threat or occurrence of a Change of
Control (as defined below) of the Company.
B. The Board believes that it is in the best interests of the Company and
its shareholders to provide the Employees with an incentive to continue their
employment with the Company.
C. The Board believes that it is imperative to provide the Employees with
certain benefits upon a Change of Control and, under certain circumstances, upon
termination of the Employees' employment in connection with a Change of Control,
which benefits are intended to provide the Employees with financial security and
provide sufficient income and encouragement to the Employees to remain with the
Company notwithstanding the possibility of a Change of Control.
D. To accomplish the foregoing objectives, the Board of Directors has
directed the Company, upon execution of this Agreement by the Employees, to
agree to the terms provided in this Agreement.
E. Certain capitalized terms used in the Agreement are defined in Section 4
below.
In consideration of the mutual covenants herein contained, and in
consideration of the continuing employment of Employees by the Company, the
parties agree as follows:
1. At-Will Employment. The Company and each of the Employees acknowledge
that his or her employment is and shall continue to be at-will, as defined under
applicable law. If any Employee's employment terminates for any reason,
including (without limitation) any termination prior to a Change of Control,
such Employee shall not be entitled to any payments, benefits, damages, awards
or compensation other than as provided by this Agreement, the terms of certain
Board resolutions and agreements issued to the Employee with respect to the
grant of stock options for the Company's securities (as described in Section 2
below) and the Company's established employee plans and written policies at the
time of termination. The terms of this Agreement shall terminate upon the date
that all obligations of the parties hereunder have been satisfied. A termination
of the terms of this Agreement pursuant to the preceding sentence shall be
effective for all purposes, except that such termination shall not affect the
payment or provision of compensation or benefits on account of a termination of
employment occurring prior to the termination of the terms of this Agreement.
2. Restricted Stock and Stock Options. Subject to Section 6 below, in the
event of a Change of Control and regardless of whether an Employee's employment
with the Company is terminated in connection with the Change of Control, the
vesting schedule for each unvested share of Common Stock or option to purchase
Common Stock held by such Employee (collectively referred to as the "Shares")
shall be accelerated by two (2) years. Thereafter, so long as Employee remains
employed by the Company (or a successor Corporation), the remaining Shares that
have not otherwise vested as of the Change of Control shall vest over the
remaining vesting term applicable to the Shares. Each stock option shall be
exercisable to the extent so vested in accordance with the provisions of the
option agreement and Plan pursuant to which such option was granted and each
share of restricted stock shall be freely transferable to the extent so vested
in accordance with the provisions of the agreement pursuant to which such stock
was purchased by Employee. 3. Change of Control.
(a) Termination Following A Change of Control. Subject to Section 5 below,
if an Employee's employment with the Company is terminated at any time within
one (1) year after a Change of Control, then such Employee shall be entitled to
receive severance benefits as follows:
(i) Voluntary Resignation. If the Employee voluntarily resigns from the
Company (other than as an Involuntary Termination (as defined below) or if the
Company terminates the Employee's employment for Cause (as defined below)), then
the Employee shall not be entitled to receive severance payments. The Employee's
benefits will be terminated under the Company's then existing benefit plans and
policies in accordance with such plans and policies in effect on the date of
termination or as otherwise determined by the Board of Directors of the Company.
(ii) Involuntary Termination. If the Employee's employment is terminated as
a result of an Involuntary Termination other than for Cause, the Employee shall
be entitled to receive the following benefits: (i) a lump sum severance payment
consisting of (a) six (6) months (the "Severance Period") of the monthly salary
which the Employee was receiving immediately prior to the Change of Control and
(b) the Employee's "target bonus" prorated over the Severance Period, with such
severance payment being made on the termination date; (ii) a prorated amount of
the Employee's "target bonus" for the fiscal year in which the termination
occurs (or for the prior fiscal year if a target bonus has not yet been
determined for the fiscal year in which the termination occurs), calculated
based on the number of months during such fiscal year in which the Employee was
employed by the Company (or a successor corporation), with such payment being
made on the termination date; (iii) continuation of all benefits through the end
of the Severance Period substantially identical to those to which the Employee
was entitled immediately prior to the Change of Control; and (iv) out-placement
services with a total value not to exceed $15,000. For purposes of this
Agreement, the term "target bonus" shall mean that percentage of the Employee's
base salary that is prescribed by the Company under its Management Bonus Program
as the percentage of such base salary payable to the Employee as a bonus if the
Company pays bonuses at one-hundred percent (100%) of its operating plan.
(iii) Involuntary Termination for Cause. If the Employee's employment is
terminated for Cause, then the Employee shall not be entitled to receive
severance payments. The Employee's benefits will be terminated under the
Company's then existing benefit plans and policies in accordance with such plans
and policies in effect on the date of termination.
(b) Termination Apart from Change of Control. In the event the Employee's
employment terminates for any reason, either prior to the occurrence of a Change
of Control or after the one year period following the effective date of a Change
of Control, then the Employee shall not be entitled to receive any severance
payments under this Agreement. The Employee's benefits will be terminated under
the Company's then existing benefit plans and policies in accordance with such
plans and policies in effect on the date of termination or as otherwise
determined by the Board of Directors of the Company.
4. Definition of Terms. The following terms referred to in this Agreement
shall have the following meanings:
(a) Change of Control. "Change of Control" shall mean the occurrence of any
of the following events:
(i) Ownership. Any "Person" (as such term is used in Sections 13(d) and
14(d) of the Securities Exchange Act of 1934, as amended) is or becomes the
"Beneficial Owner" (as defined in Rule 13d-3 under said Act), directly or
indirectly, of securities of the Company representing fifty-one percent (51%) or
more of the total voting power represented by the Company's then outstanding
voting securities without the approval of the Board of Directors of the Company;
(ii) Merger/Sale of Assets. A merger or consolidation of the Company
whether or not approved by the Board of Directors of the Company, other than a
merger or consolidation which would result in the voting securities of the
Company outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting securities of the
surviving entity) at least fifty percent (50%) of the total voting power
represented by the voting securities of the Company or such surviving entity
outstanding immediately after such merger or consolidation;
(iii) Sale of Assets; Liquidation. An agreement for the sale or disposition
by the Company of all or substantially all of the Company's assets or the
shareholders of the Company approve a plan of complete liquidation of the
Company in connection with an agreement for the sale or disposition by the
Company of all or substantially all of the Company's assets; or
(iv) Change in Board Composition. A change in the composition of the Board
of Directors of the Company, as a result of which fewer than a majority of the
directors are Incumbent Directors. "Incumbent Directors" shall mean directors
who either (A) are directors of the Company as of the date of this Agreement or
(B) are elected, or nominated for election, to the Board of Directors of the
Company with the affirmative votes of at least a majority of the Incumbent
Directors at the time of such election or nomination (but shall not include an
individual whose election or nomination is in connection with an actual or
threatened proxy contest relating to the election of directors to the Company).
(b) Cause. "Cause" shall mean (i) gross negligence or willful misconduct in
the performance of an Employee's duties to the Company where such gross
negligence or willful misconduct has resulted or is likely to result in
substantial and material damage to the Company or its subsidiaries, (ii)
repeated unexplained or unjustified absence from the Company, (iii) a material
and willful violation of any federal or state law; (iv) commission of any act of
fraud with respect to the Company; or (v) conviction of a felony or a crime
involving moral turpitude causing material harm to the standing and reputation
of the Company, in each case as determined in good faith by the Board of
Directors of the Company.
(c) Involuntary Termination. "Involuntary Termination" shall include any
termination by the Company other than for Cause and an Employee's voluntary
termination, upon 30 days prior written notice to the Company, following (i) a
material reduction or change in job duties, responsibilities and requirements
inconsistent with an Employee's position with the Company and the Employee's
prior duties, responsibilities and requirements; (ii) any reduction of an
Employee's base compensation or target bonus (other than in connection with a
general decrease for most officers of the successor corporation); or (iii) an
Employee's refusal to relocate to a facility or location more than 50 miles from
the Company's current location.
5. Tax Liability on Payments. To the extent that any of the payments or
benefits provided for in this Agreement to an Employee constitute "parachute
payments" within the meaning of Section 280G of the Internal Revenue Code of
1986, as amended (the "Code") and would be subject to the excise tax imposed by
Section 4999 of the Code, the Company will pay the Employee an amount equal to
such excise tax; provided, however, that the Employee will be responsible for
paying any and all income taxes owed by him or her as a result of receipt of
such payment from the Company and the Company will not be further obligated to
gross up Employee's payments and/or benefits to offset such income tax
obligation. 6. Certain Business Combinations. In the event it is determined by
the Board, upon receipt of a written opinion of the Company's independent
auditors, that the enforcement of any agreement between an Employee and the
Company which allows for the acceleration of vesting of stock and/or stock
options granted for the Company's securities upon the effective date of a Change
of Control, would preclude accounting for any proposed business combination of
the Company involving a Change of Control as a pooling of interests, and the
Board otherwise desires to approve such a proposed business transaction which
requires as a condition to the closing of such transaction that it be accounted
for as a pooling of interests, then any such Section of this Agreement shall be
null and void. For purposes of this Section 6, the Board's determination shall
require the unanimous approval of the non-employee Board members. 7. Successors.
Any successor to the Company (whether direct or indirect and whether by
purchase, lease, merger, consolidation, liquidation or otherwise) to all or
substantially all of the Company's business and/or assets shall assume the
obligations under this Agreement and agree expressly to perform the obligations
under this Agreement in the same manner and to the same extent as the Company
would be required to perform such obligations in the absence of a succession.
The terms of this Agreement and all of the Employees' rights hereunder shall
inure to the benefit of, and be enforceable by, each Employee's personal or
legal representatives, executors, administrators, successors, heirs,
distributees, devisees and legatees.
8. Notice. Notices and all other communications contemplated by this
Agreement shall be in writing and shall be deemed to have been duly given when
personally delivered or when mailed by U.S. registered or certified mail, return
receipt requested and postage prepaid. Mailed notices to any Employee shall be
addressed to such Employee at the home address which the Employee most recently
communicated to the Company in writing. In the case of the Company, mailed
notices shall be addressed to its corporate headquarters, and all notices shall
be directed to the attention of its Secretary.
9. Miscellaneous Provisions.
(a) No Duty to Mitigate. The Employees shall not be required to mitigate
the amount of any payment contemplated by this Agreement (whether by seeking new
employment or in any other manner), nor, except as otherwise provided in this
Agreement, shall any such payment be reduced by any earnings that any Employee
may receive from any other source.
(b) Waiver. No provision of this Agreement shall be modified, waived or
discharged as to an Employee unless the modification, waiver or discharge is
agreed to in writing and signed by the Employee and by an authorized officer of
the Company (other than the Employee). No waiver by either party of any breach
of, or of compliance with, any condition or provision of this Agreement by the
other party shall be considered a waiver of any other condition or provision or
of the same condition or provision at another time.
(c) Whole Agreement. No agreements, representations or understandings
(whether oral or written and whether express or implied) which are not expressly
set forth in this Agreement have been made or entered into by either party with
respect to the subject matter hereof. This Agreement supersedes any agreement of
the same title and concerning similar subject matter dated prior to the date of
this Agreement, and by execution of this Agreement both parties agree that any
such predecessor agreement shall be deemed null and void.
(d) Choice of Law. The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of the State of
California without reference to conflict of laws provisions.
(e) Severability. If any term or provision of this Agreement or the
application thereof to any circumstance shall, in any jurisdiction and to any
extent, be invalid or unenforceable, such term or provision shall be ineffective
as to such jurisdiction to the extent of such invalidity or unenforceability
without invalidating or rendering unenforceable the remaining terms and
provisions of this Agreement or the application of such terms and provisions to
circumstances other than those as to which it is held invalid or unenforceable,
and a suitable and equitable term or provision shall be substituted therefor to
carry out, insofar as may be valid and enforceable, the intent and purpose of
the invalid or unenforceable term or provision.
(f) Arbitration. Any dispute or controversy arising under or in connection
with this Agreement may be settled at the option of either party by binding
arbitration in the County of Santa Clara, California, in accordance with the
rules of the American Arbitration Association then in effect. Judgment may be
entered on the arbitrator's award in any court having jurisdiction. Punitive
damages shall not be awarded.
(g) Legal Fees and Expenses. The parties shall each bear their own
expenses, legal fees and other fees incurred in connection with this Agreement.
(h) No Assignment of Benefits. The rights of any person to payments or
benefits under this Agreement shall not be made subject to option or assignment,
either by voluntary or involuntary assignment or by operation of law, including
(without limitation) bankruptcy, garnishment, attachment or other creditor's
process, and any action in violation of this subsection (h) shall be void.
(i) Employment Taxes. All payments made pursuant to this Agreement will be
subject to withholding of applicable income and employment taxes.
(j) Assignment by Company. The Company may assign its rights under this
Agreement to an affiliate, and an affiliate may assign its rights under this
Agreement to another affiliate of the Company or to the Company; provided,
however, that no assignment shall be made if the net worth of the assignee is
less than the net worth of the Company at the time of assignment. In the case of
any such assignment, the term "Company" when used in a section of this Agreement
shall mean the corporation that actually employs the Employee.
(k) Counterparts. This Agreement may be executed in counterparts, each of
which shall be deemed an original, but all of which together will constitute one
and the same instrument.
IN WITNESS WHEREOF, each of the parties has executed this Agreement, in
the case of the Company by its duly authorized officer, as of the day and year
first above written.
QUALITY SEMICONDUCTOR, INC. EMPLOYEE
By:
Title:
<PAGE>
Exhibit 11.1
QUALITY SEMICONDUCTOR, INC.
STATEMENT OF COMPUTATION OF EARNINGS (LOSS) PER SHARE
(In thousands, except per share data)
September 30,
1997 1996 1995
------------ ------------ -------------
Net income (loss) $210 $(1,310) $4,766
============ ============ ============
Computation of common and common
equivalents
shares outstanding
Common stock 6,361 5,524 4,750
Options and warrants 628 - 559
Cheap stock - - 29
Preferred shares - - 311
=========== ============ ============
Shares used in computing per share 6,989 5,524 5,649
amounts
=========== ============ ============
Net income (loss) per share $0.03 $(0.24) $0.84
============ ============ ============
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 Incorporation Names Under Which Subsidiary
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 Statements
(Form S-8 Nos. 33-89724,333,3234 and 333-25809; and Amendment No. 1 to Form S-3
No. 333-30189) of our report dated October 22, 1997, 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, 1997.
/s/ Ernst & Young LLP
San Jose, California
December 17, 1997
<PAGE>
Exhibit 24.1
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 19, 1997 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, 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 19, 1997
- --------------------------
Chun P. Chiu
/s/ R. Paul Gupta Director, President and December 19, 1997
- --------------------------
R. Paul Gupta Chief Executive Officer
/s/ Richard A. Bottomley Chief Financial Officer - Acting December 19, 1997
- --------------------------
Richard A. Bottomley
/s/ Andrew J.S. Kang Director December 19, 1997
Andrew J. S. Kang
/s/ Robert L. Puette Director December 19, 1997
- --------------------------
Robert L. Puette
/s/ Masaharu Shinya Director December 19, 1997
Masaharu Shinya
/s/ David D. Tsang Director December 19, 1997
- --------------------------
David D. Tsang
<PAGE>
Exhibit 27.1
QUALITY SEMICONDUCTOR, INC.
Financial Data Schedule
(In thousands, except per share data)
Cash and cash items $9,403
Marketable securities 3,656
Notes and accounts receivable - trade 7,253
Allowances for doubtful accounts 314
Inventory 17,689
Total current assets 44,823
Property, plant and equipment 39,034
Accumulated depreciation 16,175
Total assets 69,832
Total current liabilities 17,048
Bonds, mortgages and similar debt --
Preferred stock - mandatory redemption --
Preferred Stock - non-mandatory redemption --
Common Stock 7
Other Stockholders' Equity 43,630
Total liabilities and stockholders' equity 69,832
Net sales of tangible products 62,691
Total revenue 62,691
Cost of tangible goods sold 40,073
Total costs and expenses applicable 61,971
to sales and revenue
Other costs and expenses 21,898
Provision for doubtful accounts and notes 314
Interest and amortization of debt discount 1,122
Income before taxes 322
Income tax expense 112
Income/loss continuing operations 210
Discontinued operations --
Extraordinary items --
Cumulative effect-changes in accounting --
principles
Net income or loss 210
Earnings per share - primary 0.03
Earnings per share - fully diluted 0.03
