UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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X QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
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OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1996
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
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OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from ________ to ___________
Commission File Number 2-23128
Quality Semiconductor, Inc.
(Exact name of registrant as specified in it charter)
California 77-0199189
(State of Incorporation) (IRS Employer
Identification Number)
851 Martin Avenue
Santa Clara, California 95050
(Address of principal executive office)
Registrant's telephone number, including area code: (408) 450-8000
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
The number of outstanding shares of the Registrant's Common Stock as of
December 31, 1996 was 5,976,472
<PAGE>
Quality Semiconductor, Inc.
Form 10-Q for the Quarter Ended December 31, 1996
INDEX
PART I. FINANCIAL INFORMATION Page
Item 1 - Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of December 31,
1996 and September 30, 1996 3
Condensed Consolidated Income Statements for the three
months ended December 31, 1996 and December 31, 1995 4
Condensed Consolidated Statements of Cash Flows for the three
months ended December 31, 1996 and December 31, 1995 5
Notes to Condensed Consolidated Financial Statements 6
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II. OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K/A 13
Signatures 14
Exhibit 11.1 15
Exhibit 27.1 16
<PAGE>
PART I. FINANCIAL INFORMATION
Quality Semiconductor, Inc.
Condensed Consolidated Balance Sheets
(In thousands)
<TABLE>
December 31, September 30,
1996 1996 (1)
----------------- ----------------
(Unaudited)
ASSETS
Current Assets:
<S> <C> <C>
Cash and cash equivalents $6,890 $4,930
Short-term investments 2,010 2,403
Accounts and other receivables, net 8,006 7,348
Inventories 14,601 13,984
Other current assets 2,989 2,771
----------------- ----------------
Total current assets 34,496 31,436
Property and equipment, net 20,259 18,079
Goodwill and other assets 2,879 3,006
================= ================
Total assets $57,634 $52,521
================= ================
LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities:
Accounts payable $1,987 $2,749
Accounts payable to related parties 1,463 747
Accrued liabilities 3,620 4,159
Deferred income on shipments to distributors 2,264 2,018
Redeemable preference shares to AWA, Ltd., due within one year 3,000 6,993
Notes payable to related party due within one year 1,115 667
----------------- ----------------
Total current liabilities 13,449 17,333
Redeemable preference shares to AWA, Ltd. 4,213 -
Notes payable to related party 4,385 2,840
Deferred tax liabilities 2,020 2,003
Shareholders' equity
Preferred stock, $.001 par value: Authorized 1,000;
Issued and outstanding - none - -
Common stock, $.001 par value, Authorized - 25,500,
Issued and outstanding 5,976 and 5,536 6 5
Additional paid-in-capital 31,169 28,348
Retained earnings 2,754 2,412
Deferred compensation (362) (420)
----------------- ----------------
Total shareholders' equity 33,567 30,345
================= ================
Total liabilities and shareholders' equity $57,634 $52,521
================= ================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
(1) The information in this column was derived from the Company's audited
financial statements.
<PAGE>
Quality Semiconductor, Inc.
Condensed Consolidated Income Statements
(Unaudited)
(In thousands, except per share data)
Three months ended
December 31,
-----------------------------------
1996 1995
---------------- ---------------
Total revenues $12,345 $11,708
Cost of revenues 7,238 6,435
---------------- ---------------
Gross margin 5,107 5,273
Operating expenses
Research and development 2,110 1,516
Sales and marketing 1,788 1,713
General and administrative 925 898
---------------- ---------------
Total operating expenses 4,823 4,127
---------------- ---------------
Operating income 284 1,146
Interest, net (83) 171
---------------- ---------------
Income before provision for income taxes 201 1,317
Provision for income taxes 70 460
================ ===============
Net income $131 $857
================ ===============
Net income per share $0.02 $0.15
================ ===============
Shares used in computing net income per share 6,185 5,883
================ ===============
See accompanying notes to condensed consolidated financial statements.
<PAGE>
Quality Semiconductor, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
Three months
ended December 31,
---------------------------
1996 1995
---------- -------------
Operating activities
Net income $131 $857
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 1,420 581
Accretion on preference shares 152 -
Deferred income taxes 17 -
Deferred compensation amortization 58 57
Changes in operating assets and (1,832) (2,302)
liabilities
---------- ------------
Net cash used in by operating activities (54) (807)
Investing activities
Capital expenditures (1,136) (391)
Sales of short-term investments, net 393 194
Deposits and other Assets 66 15
---------- -------------
Net cash used in investing activities (677) (182)
Financing activities
Principal payments on capital lease obligations - (43)
Principal payments on long-term debt (131) (311)
Proceeds from private placement, net of issuance 2,850 -
costs
Proceeds from issuance of stock, net of repurchases (28) 103
---------- -------------
Net cash provided by (used in) financing activities 2,691 (251)
---------- -------------
Net increase (decrease) in cash and cash 1,960 (1,240)
equivalents
Cash and cash equivalents at beginning of period 4,930 7,637
========== =============
Cash and cash equivalents at end of period $6,890 $6,397
========== =============
Supplemental disclosures of significant non-cash investing and financing
activities:
Conversion of promissory notes into common stock $3,000 -
Acquisition of property and equipment for
issuance of long term debt $2,192 -
See accompanying notes to condensed consolidated financial statements.
<PAGE>
QUALITY SEMICONDUCTOR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Basis of Presentation
The accompanying financial statements have been prepared by the Company
without audit and reflect all adjustments (consisting of normal recurring
accruals) which are, in the opinion of management, necessary to present fairly
the financial information included therein. The consolidated financial
statements include the accounts of the Company and its wholly owned subsidiary,
Quality Semiconductor Australia, Pty., Ltd. (QSA). Intercompany accounts and
transactions have been eliminated in consolidation. This financial data should
be read in conjunction with the Company's September 30, 1996 annual financial
statements.
The functional currency of the Company's foreign subsidiary is the
Australian Dollar. Subsidiary financial statements are remeasured into U.S.
Dollars for consolidation. Foreign currency transaction gains and losses were
immaterial for all periods presented.
The Company's fiscal quarters end on the last Sunday of each calendar
quarter. For convenience, the accompanying financial statements have been shown
as ending on the last day of the calendar month.
The results of operations for the three months ended December 31, 1996
may not necessarily be indicative of the results for the fiscal year ending
September 30, 1997.
Note 2. Inventories
Inventories are stated at the lower of standard cost which approximates
actual (first-in, first-out method) or market (estimated net realizable value).
Inventories consisted of (in thousands):
December 31, September 30,
1996 1996
---------------- ----------------
Raw Materials $5,606 $7,141
Work-in-process 3,970 2,578
Finished goods 5,025 4,265
================ ================
$14,601 $13,984
================ ================
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 take
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.
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 on
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.
<PAGE>
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.
Note 3. Earnings Per Share
Earnings per common and common equivalent share as presented on the
face of the condensed consolidated statements of income represent primary
earnings per share. Dual presentation of primary and fully diluted earnings per
share has not been made because the differences are insignificant.
Note 4. Convertible Promissory Notes
In November 1996, the Company negotiated a private placement of
unsecured, convertible promissory notes in the principal amount of $5.0 million,
of QSA. The notes are convertible at the option of the investors of the Company
into either 732,931 shares of the Company's common stock or 732,931 shares of
non-voting Series B Preference shares of QSA. The Company received $3 million of
the total financing by December 1996, which were converted into 439,758 shares
of common stock. The Company expects to receive the remaining $2 million no
later than February 28, 1997.
Note 5. Redeemable Preference Shares
In December 1996 the company negotiated revised payment terms on the
balance due to AWA Limited as a result of the acquisition of the wafer
fabrication facility from AWA MicroElectronics Pty. Ltd. The revised payment at
the option of the company is either $3.0 million by January 31, 1997 and the
balance of $4.0 million by January 31, 1998 or $3.0 million by July 31, 1997 and
the balance of $4.0 million by January 31, 1998. If the latter payment option is
elected then the $4.0 million balance will bear interest at 10% from July 1,
1997. In January 1997, the Company elected the latter option to pay the first
installment of $3.0 million by July 31, 1997.
<PAGE>
QUALITY SEMICONDUCTOR, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
On February 16, 1996 the Company acquired certain assets of AWA
Microelectonics Pty. Ltd. ("AWAM"), a subsidiary of AWA Limited, based in
Sydney, Australia. The AWAM assets that were acquired by a new subsidiary of the
Company, Quality Semiconductor Australia, Pty. Ltd. ("QSA"), included a fully
operational wafer foundry business and product design center. Beginning February
16, 1996, the company began manufacturing wafers in this facility for sale to
customers. The Company's results of operations include the operations of QSA
from February 16, 1996.
Total revenues for the quarter ended December 31, 1996 increased 5.4%
from the corresponding period in the prior fiscal year. This increase in
revenues was due to increase in sales to OEM customers, particularly in sales of
proprietary networking products partially offset by lower average selling prices
and a decrease in sales through distribution. As is typical in the Semiconductor
Industry, the average selling prices of the Company's products generally decline
over the lives of such products. To increase revenues, the Company seeks to
increase unit sales of existing products, principally by reducing prices, and to
introduce and sell new products. No assurance can be given that these efforts
will be successful. There can be no assurance that the market for semiconductor
products will either remain at its current level or grow in future periods.
Further, there can be no assurance that the Company will be able to increase or
maintain its market share in the future or to sustain historical growth rates.
The gross margin was 41.4% of revenues in the first quarter of fiscal
1997 as compared to 45.0% in the first quarter of fiscal 1996. The lower margins
were principally due to changes in product mix, absorption of fixed costs at QSA
and lower average selling prices, which were offset in part by the sale of
higher margin new products and the Company's cost reduction programs. The
Company's gross margin can be affected by a number of factors including changes
in product or distribution channel mix, cost and availability of parts, and
competitive pressures on pricing. The Company continues to experience increasing
pricing pressure from its competitors. The Company's margins can vary depending
upon the mix of distributor and direct sales in any particular fiscal period and
the Company anticipates that this mix will continue to fluctuate in future
periods. As a result of the above factors, gross margin fluctuations are
difficult to predict, and there can be no assurance that the Company will
maintain gross margins at current levels in future periods.
Research and development expenses were $2.1 million or 17.1% of
revenues in the first quarter of fiscal 1997 as compared to $1.5 million or
12.9% of revenues in the first quarter of fiscal 1996. This increase 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, and not
included in the first quarter of fiscal 1996. The Company expects that its
research and development expenses will increase, although such expenses may vary
as a percentage of revenues in future periods. The company believes that the
continued development of its process technology and new products is essential to
continue its investment in research and development to maintain a strong
technological position in the industry.
<PAGE>
Sales and marketing expenses were $1.8 million or 14.4% of total
revenues in the first quarter of 1997, as compared to $1.7 million or 14.6% of
total revenues in the first quarter of fiscal 1996. The increase in selling
expenses was primarily attributed to increased sales commissions as a result of
higher revenue. The Company believes that increased expenses for sales and
marketing activities, particularly in export markets, are essential to
maintaining its competitive position. The Company expects that selling and
marketing expenses will continue to increase but may vary as a percentage of
total revenue in future periods. However, there can be no assurance that the
revenues will grow at the same rate as expenditures for sales and marketing are
incurred.
General and administrative expenses were $0.9 million or 7.5% of total
revenues in the first quarter of fiscal 1997, as compared to $0.9 million or
7.7% of total revenues in the first quarter of fiscal 1996. The increases in the
first quarter of fiscal 1997 were due mainly to added G&A costs of the
Australian subsidiary off-set in part by lower payroll related costs.
Interest expense, net of interest income, was $83,000 during the three
months ended December 31, 1996 compared to net interest income of $171,000
during the first quarter of fiscal 1996. The change was due to use of $5.0
million of funds for the purchase of AWAM assets in February 1996, increased
interest expense associated with the Kanematsu notes used to purchase property
and equipment for QSA and interest on the Redeemable Preference Shares issued as
part of the consideration for the purchase of QSA.
The Company's estimated effective tax rate was 35% for the first
quarter of fiscal 1997 and 35% for the first quarter of fiscal 1996. This rate
is based on the estimated annual tax rate complying with Statement of Financial
Accounting Standards No. 109 "Accounting for Income Taxes".
Additional Factors That May Affect Results
The Company's quarterly and annual operating results are affected by a
wide variety of factors that could materially and adversely affect revenues and
profitability, including, among others, factors pertaining to (i) competition,
such as competitive pressures on average selling prices of the Company's
products and the introduction of new products by competitors; (ii) the current
and anticipated future dependence on the Company's existing product lines; (iii)
new product development, such as increased research, development and marketing
expenses associated with new product introductions, the Company's ability to
introduce new products and technologies on a timely basis and the amount and
timing of recognition 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; (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.
<PAGE>
The semiconductor industry is intensely competitive and is
characterized by price erosion, declining gross margins, rapid technological
change, product obsolescence and heightened international competition in many
markets. The Company's competitors include large semiconductor companies that
have substantially greater financial, technical, marketing, distribution and
other resources, broader product lines and longer standing relationships with
customers than the Company, as well as emerging companies attempting to sell
products to specialized markets such as those addressed by the Company. As a
result, ASPs in the semiconductor industry generally, and for the Company's
products in particular, have decreased significantly over the life of each
product. The Company expects that ASPs for its existing products will continue
to decline over time and that ASPs for each new product will decline
significantly over the life of the product. Declines in ASPs in the Company's
products, if not offset by reductions in the cost of producing those products or
by sales of new products with higher gross margins, would decrease the Company's
overall gross margins, could cause a negative adjustment to the valuation of the
Company's inventories and could materially and adversely affect the Company's
operating results.
A substantial majority of the Company's revenues are derived from sales
of interface logic devices and, in particular, products in the Company's QSFCT
and QuickSwitch logic family. The Company anticipates that sales of these
products will continue to comprise the bulk of the Company's revenues for the
foreseeable future. The demand for such products may be sharply reduced by
microprocessors or other system devices that increasingly include interface
logic. Because of the Company's dependence on sales of these products, declines
in gross margins for these products resulting from declines in ASPs or otherwise
could have a material adverse effect on the Company's operating results.
The Company's future success is highly dependent upon the timely
completion and introduction of new products at competitive price/performance
levels. The failure of the Company to timely complete and introduce new products
at competitive price/performance levels would materially and adversely affect
the Company's operating results. New products are generally incorporated into a
customer's product or system at the design stage. However, design wins, which
can often require significant expenditures by the Company, may precede the
generation of volume sales, if any, by a year or more. No assurance can be given
that the Company will achieve design wins or that any design win will result in
significant future revenues.
Currently, over 85% of the wafers for the Company's semiconductor
products, including substantially all of the Company's high-volume QSFCT
products, are fabricated by Seiko Instruments Inc. ("Seiko") and Ricoh
Corporation ("Ricoh"), and the remainder of the Company's products, including
the Company's more advanced, smaller geometry circuits, are fabricated by Yamaha
Corporation ("Yamaha") and Taiwan Semiconductor Manufacturing Company Ltd.
("TSMC"). The Company's reliance on its suppliers to fabricate its wafers at
their production facilities in Japan and Taiwan involves significant risks,
including reduced control over delivery schedules, potential lack of adequate
capacity, technical difficulties and events limiting production, such as fires
or other damage to production facilities. The Company has from time to time
experienced significant delays in receiving fabricated wafers from Seiko and
Yamaha, and there can be no assurance that the Company will not experience
similar or more severe delays from its suppliers in the future. Any inability or
unwillingness of the Company's fabrication providers to provide adequate
quantities of finished wafers to meet the Company's needs could delay shipments
and have a material adverse effect on the Company's operating results. The
Company's reliance on third-party wafer fabrication suppliers also increases the
length of the development cycle for the Company's products, which may provide
time to market advantages to competitors that have in-house fabrication
capacity. The Company also depends upon its fabrication suppliers to participate
in process improvement efforts, such as the transition to finer geometries, and
any inability or unwillingness of such suppliers to do so could adversely affect
the Company's development and introduction of new products. Competitors having
their own wafer fabrication facilities, or access to suppliers having such
facilities, using superior process technologies at the same geometries or
manufacturing products at smaller geometries, could manufacture and sell
competitive, higher performance products at a lower price. The introduction of
such products by competitors could materially and adversely affect the Company's
operating results. The Company acquired a wafer fabrication facility on February
16, 1996 which involves significant risks inherent in any manufacturing
endeavor, including production yields, technical difficulties with process
control, and events limiting production, such as fires or other damage.
<PAGE>
The Company relies on overseas subcontractors for the assembly and
testing of its finished products. Any significant disruption in adequate
supplies from, or degradation in the quality of components or services supplied
by, these subcontractors, or any other circumstance that would require the
Company to qualify alternative sources of supply, could delay shipment and
result in the loss of customers, limitations or reductions in the Company's
revenues, and other adverse effects on the Company's operating results.
The Company purchases a significant amount of its semiconductor wafers
and substantially all of its assembly services from foreign suppliers. In
addition, sales outside of North America accounted for approximately 41% of the
Company's net revenue in the first quarter of fiscal 1997 as compared to 36% in
the first quarter of fiscal 1996. As a result, the Company's business is subject
to the risks generally associated with doing business abroad, such as foreign
governmental regulations, reduced protection for intellectual property rights,
political unrest, disruptions or delays and shipments and changes in economic
conditions in countries in which the Company's manufacturing and test assembly
sources are located. The Company's purchases of wafers from Seiko Instruments
Inc. are denominated in Japanese yen. Although the Company has engaged in
hedging activities to mitigate exchange rate risks, there can be no assurance
that the Company will not be materially adversely affected by a decline in
exchange rate.
The semiconductor industry is characterized by substantial litigation
regarding patent and other intellectual property rights. There can be no
assurance that third parties will not assert claims against the Company that
result in litigation. Any such litigation could result in significant expense
and divert the Company's attention from other matters. If any of the Company's
products were found to infringe any third party patent, and such patent were
determined to be valid, the third party would be entitled to injunctive relief,
which would prevent the Company from selling any such infringing products. In
addition, the Company could suffer significant monetary damages, which could
include treble damages for any infringement that is determined to be willful.
The Company's future success will depend to a large extent on the
continued contributions of key employees, who would be difficult to replace, and
its ability to attract and retain qualified marketing, technical and management
personnel, particularly highly skilled design, process and test engineers, for
whom competition is intense. The loss of or failure to attract and retain any
such persons could have a material adverse effect on the Company's business. To
manage recent and potential future growth effectively, the Company will need to
continue to implement and improve its operational, financial and management
information systems and to hire, train, motivate and manage its employees. There
can be no assurance that the Company will be able effectively to achieve growth
or manage any such growth, and failure to do so could have a material adverse
effect on the Company's operating results.
A relatively small number of customers have accounted for a significant
portion of the Company's revenue in the past. For example, in fiscal 1995 and
1994, sales to the Company's top ten systems manufacturer customers accounted
for more than half of total product revenues. Loss of one or more of the
Company's current customers could materially and adversely affect the Company's
business, operating results and financial condition. In addition, the Company
has experienced and may continue to experience lower margins on sales to
significant customers as a result of volume pricing arrangements.
<PAGE>
The Company markets and distributes its products primarily through
manufacturers' representatives and independent distributors. Domestic
distributors accounted for approximately 19% of the Company's total revenues
during the first quarter of fiscal 1997 and 26% in the first quarter of fiscal
1996. The Company's distributors typically offer competing products. The
distribution channels have been characterized by rapid change, including
consolidations and financial difficulties. The loss of one or more
manufacturers' representatives or distributors, or the decision by one or more
distributors to reduce the number of the Company's products offered by such
distributor or to carry the product lines of the Company's competitors, could
have a material adverse effect on the Company's operating results.
The semiconductor industry has historically been cyclical and subject
to significant economic downturns at various times and has been characterized by
diminished product demand, accelerated erosion of ASPs and over capacity. In
addition, the end-markets for systems that incorporate the Company's products
are characterized by rapidly changing technology and evolving industry
standards. The Company may experience substantial period-to-period fluctuations
in future operating results due to general semiconductor industry conditions,
overall economic conditions or other factors.
The Company's earnings and stock price have been, and may be subject to
significant volatility, particularly on a quarterly basis. Any shortfall in
revenue, gross margins or earnings from expected levels could have an immediate
and significant adverse effect on the trading price of the Company's stock in
any given period. The Company may not learn of, or be able to confirm revenue,
gross margin or earnings shortfalls until late in the quarter, or following the
end of the quarter, because a significant portion of the Company's revenue in a
quarter typically is shipped in the last few weeks of that quarter. In addition,
future announcements concerning the Company or its competitors, including
technological innovations, new product introductions, governmental regulations,
litigation, or changes in earnings estimates by analysts, may cause the market
price of the Company's stock to fluctuate substantially. Stock prices for many
technology companies fluctuate widely for reasons that may be unrelated to
operating results, such as general economic, political and market conditions.
The Company's stock price is also subject to potentially large volatility due to
the very low trading volumes of the Company's stock on most days since the
initial public offering of the Company's stock on November 17, 1994. In
addition, this low trading volume may continue and could affect the ability of
shareholders to sell their shares.
<PAGE>
Liquidity and Capital Resources
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 anticipates receiving the remaining balance no later than February 28, 1997.
The Company intends to use the proceeds for payment on the debt incurred in
connection with the acquisition of certain assets of AWAM, general corporate
purposes and working capital.
During the first three months ended December 31, 1996 the Company used
$54,000 in cash from operating activities compared to $807,000 used during the
first three months of fiscal 1996. Cash used in investing activities during the
three months of fiscal 1997 totaled $677,000 compared to $182,000 in the first
three months of fiscal 1996. The former reflected mainly the purchase of
property and equipment of $1,136,000. Proceeds provided by financing activities
of $2,691,000 for the first three months of 1997 were primarily from the receipt
of $2,850,000 from the partial completion of the private placement ($5.0 million
in total, prior to issuance costs) in December 1996. The Company expects to
receive the remaining $2.0 million no later than February 28, 1997. See Note 4
of Notes to Condensed Consolidated Financial Statements. Financing activities
for the first three months of fiscal 1996 used cash of $251,000 primarily due to
the payment on long-term debt, offset by the sale of stock.
On March 28, 1996, the company entered into an agreement with Kanematsu
USA Inc., an affiliate of Kanematsu Semiconductor Corporation, a shareholder of
the Company, to finance approximately $8.0 million of wafer fabrication
equipment for installation at QSA. The agreement expires March 31, 2001 and the
borrowings bear interest at a rate of 8.5%. There were approximately $5.5
million of borrowings outstanding under the agreement at December 31, 1996.
The Company believes that current available cash, short-term
investments, cash generated from operations and credit arrangements will be
sufficient to finance the Company's anticipated operations and capital equipment
requirements through fiscal 1997. However, there can be no assurance that events
in the future will not require the Company to seek additional capital or, if so
required, that adequate capital will be available to the Company.
<PAGE>
PART II OTHER INFORMATION
Item 1. Not Applicable
Item 2. Changes in Securities
On November 21, 1996, the Company negotiated the
private placement for cash of unsecured convertible promissory
notes in the principal amount of $5.0 million of QSA. Needham
& Company will receive a 1% placement fee upon completion of
the transaction. The lead investors were affiliated with
Fidelity Venture Capital Corporation and Technology Associates
Corporation, both of Taiwan. The notes are convertible at the
option of the investors of the Company into either 732,931
shares of the Company's common stock or 732,931 shares of
non-voting Series B Preference shares of QSA. The Company has
received $3.0 million of the total financing as of December
31, 1996 and has converted the notes issued for such amount
into 439,758 shares of the Company's common stock. The Company
expects to receive the remaining $2 million no later than
February 28, 1997. The Company is relying on the private
placement exemption provided by Section 4(2) of the Securities
Act of 1933, as amended, with respect to placement of the
notes and the issuance of shares of unregistered common stock
of the Company underlying the convertible notes.
Items 3-5 Not Applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
No. 11.1 - Statement of Computation of Earnings Per Share
(b) Reports on Form 8-K
On December 10, 1996, the Company filed a report, on
Form 8-K reporting under Item 5 thereof, regarding
the sale of $5.0 million of unsecured convertible
promissory notes of Quality Semiconductor Australia,
Pty. Ltd. A subsidiary of the Company.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Quality Semiconductor, Inc.
(Registrant)
Date: February 10, 1997 By: / s / R. Paul Gupta
-------------------
R. Paul Gupta
Chief Executive Officer
Date: February 10, 1997 By: / s / Stephen H. Vonderach
--------------------------
Stephen H. Vonderach
Chief Financial Officer
Chief Accounting Officer
<PAGE>
Exhibit 11.1
QUALITY SEMICONDUCTOR, INC.
STATEMENT OF COMPUTATION OF EARNINGS PER SHARE
(In thousands, except per share data)
Quarter Ended
December 31,
1996 1995
------------ ------------
Net income $ 131 $ 857
============ ============
Computation of common and common
equivalents
shares outstanding
Common stock 5,664 5,499
Options and warrants 521 384
============ ============
Shares used in computing per share
amounts 6,185 5,883
============ ============
Net income per share $0.02 $0.15
============ ============
- ----------
Fully diluted computation not presented since such amount differs by less than
3% of the net income per share amount shown above.
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000869886
<NAME> Financial Data Schedule
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1.000
<CASH> 6,980
<SECURITIES> 2,010
<RECEIVABLES> 7,916
<ALLOWANCES> (257)
<INVENTORY> 14,601
<CURRENT-ASSETS> 34,496
<PP&E> 32,931
<DEPRECIATION> (12,672)
<TOTAL-ASSETS> 57,634
<CURRENT-LIABILITIES> 13,449
<BONDS> 0
4,213
0
<COMMON> 6
<OTHER-SE> 31,169
<TOTAL-LIABILITY-AND-EQUITY> 57,634
<SALES> 12,345
<TOTAL-REVENUES> 12,345
<CGS> 7,238
<TOTAL-COSTS> 12,061
<OTHER-EXPENSES> (83)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 201
<INCOME-TAX> 70
<INCOME-CONTINUING> 131
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 131
<EPS-PRIMARY> $0.02
<EPS-DILUTED> $0.02
