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 March 31, 1997
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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 March
31, 1997 was 5,999,162.
<PAGE>
Quality Semiconductor, Inc.
Form 10-Q for the Quarter Ended March 31, 1997
INDEX
PART I. FINANCIAL INFORMATION Page
Item 1 - Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of March 31, 1997 and
September 30, 1996 3
Condensed Consolidated Income Statements for the three
months and six months ended March 31, 1997 and March 31, 1996 4
Condensed Consolidated Statements of Cash Flows for the six months
ended March 31, 1997 and March 31, 1996 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 2 - Changes in Securities 14
Item 4 - Submission of Matters to a Vote of Security Holders 14
Item 6 - Exhibits and Reports on Form 8-K/A 15
Signatures 16
Exhibit 11.1 17
Exhibit 27.1 18
<PAGE>
PART I. FINANCIAL INFORMATION
Quality Semiconductor, Inc.
Condensed Consolidated Balance Sheets
(In thousands, except par values)
<TABLE>
<CAPTION>
March 31, September 30,
1997 1996 (1)
----------------- ----------------
(Unaudited)
ASSETS
Current Assets:
<S> <C> <C>
Cash and cash equivalents $5,210 $4,930
Short-term investments 3,840 2,403
Accounts and other receivables, net 11,221 7,348
Inventories 13,544 13,984
Other current assets 2,766 2,771
----------------- ----------------
Total current assets 36,581 31,436
Property and equipment, net 20,457 18,079
Goodwill and other assets 2,672 3,006
================= ================
Total assets $59,710 $52,521
================= ================
LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities:
Accounts payable $2,929 $2,749
Accounts payable to related parties 673 747
Accrued liabilities 3,525 4,159
Deferred income on shipments to distributors 3,412 2,018
Redeemable preference shares to AWA, Ltd., due within one year 7,150 6,993
Notes payable to related party due within one year 1,302 667
----------------- ----------------
Total current liabilities 18,991 17,333
Notes payable to related party 4,691 2,840
Deferred tax liabilities 1,992 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 5,999 and 5,536 6 5
Additional paid-in-capital 31,200 28,348
Retained earnings 3,136 2,412
Deferred compensation (306) (420)
----------------- ----------------
Total shareholders' equity 34,036 30,345
================= ================
Total liabilities and shareholders' equity $59,710 $52,521
================= ================
See accompanying notes to condensed consolidated financial statements.
(1) The information in this column was derived from the Company's audited
financial statements.
</TABLE>
<PAGE>
Quality Semiconductor, Inc.
Condensed Consolidated Income Statements
(Unaudited)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended Six months ended
March 31, March 31,
------------------------------ -------------------------------------
1997 1996 1997 1996
------------- ------------- ---------------- ------------------
<S> <C> <C> <C> <C>
Net revenues $13,302 $10,624 $25,647 $22,332
Cost of revenues 7,689 6,012 14,927 12,447
------------- ------------- ---------------- ------------------
Gross margin 5,613 4,612 10,720 9,885
Operating expenses:
Research and development 2,104 1,493 4,214 3,009
Sales and marketing 1,896 1,894 3,684 3,607
General and administrative 957 1,050 1,882 1,948
------------- ------------- ---------------- ------------------
Total operating expenses 4,957 4,437 9,780 8,564
------------- ------------- ---------------- ------------------
Operating income 656 175 940 1,321
Other income -- 479 -- 479
Interest, net (84) 68 (167) 239
------------- ------------- ---------------- ------------------
Income before provision for income taxes 572 722 773 2,039
Provision for income taxes 200 255 270 715
============= ============= ================ ==================
Net income $372 $467 $503 $1,324
============= ============= ================ ==================
Net income per share $0.06 $0.08 $0.08 $0.23
============= ============= ================ ==================
Shares used in computing net income per share 6,614 5,565 6,400 5,724
============== ============= ================ ==================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
Quality Semiconductor, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
Six months ended
March 31,
---------------------------
1997 1996
----------- -------------
Operating activities
Net income $503 $1,324
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 2,885 1,433
Accretion on preference shares 157 -
Deferred income taxes (11) 2,188
Deferred compensation amortization 114 114
Changes in operating assets and (2,562) (4,490)
liabilities
----------- ------------
Net cash provided by operating activities 1,086 569
Investing activities
Capital expenditures (1,841) (1,124)
Sales (purchases) of short-term investments, net (1,437) 6,159
Acquisition expenditures - (4,397)
Goodwill and other assets 117 (3,063)
----------- -------------
Net cash used in investing activities (3,161) (2,425)
Financing activities
Principal payments on capital lease obligations - (84)
Principal payments on long-term debt (498) (311)
Proceeds from notes payable, net of issuance costs 2,850 -
Proceeds from issuance of stock, net of repurchases 3 387
---------- -------------
Net cash provided by (used in) financing activities 2,355 (8)
---------- -------------
Net increase (decrease) in cash and cash 280 (1,864)
equivalents
Cash and cash equivalents at beginning of period 4,930 7,637
========== =============
Cash and cash equivalents at end of period $5,210 $5,773
========== =============
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 $2,984 $6,574
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. Translation adjustments, which result from the
process of translating foreign currency financial statements into US dollars,
are included in shareholders' equity.
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 six months ended March 31, 1997 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):
March 31, September 30,
1997 1996
---------------- ----------------
Raw Materials $5,616 $7,141
Work-in-process 3,561 2,578
Finished goods 4,367 4,265
================ ================
$13,544 $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
<PAGE>
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.
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.
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, earnings per share, which is required to be adopted on
December 31, 1997. At that time, the Company will be required to change the
method currently used to compute earnings per share and to restate all prior
periods. Under the new requirements for calculating primary earnings per share,
the dilutive effect of stock options and warrants will be excluded. The impact
of Statement No. 128 on the calculation of primary and fully diluted earnings
per share for three and six months ended March 31, 1997, and 1996, is not
material.
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 $3.0 million
of the total financing by December 1996, which were converted into 439,758
shares of common stock. In March 1997, the Company decided not to sell, and one
of the investors agreed not to buy $2.0 million of the notes.
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
terms are $3.0 million by July 31, 1997 and the balance of $4.0 million by
January 31, 1998. The $4.0 million balance will bear interest at 10% from July
1, 1997.
<PAGE>
QUALITY SEMICONDUCTOR, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21 of the
Securities Exchange Act of 1934, as amended. Actual results could differ from
those projected in the forward-looking statements as a result of the factors set
forth in "Factors That May Affect Future Results" and elsewhere in this report,
as well as factors set forth in the Company's Annual Report on Form 10-K.
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.
Net revenues for the quarter ended March 31, 1997 increased 25% from
the corresponding period in the prior fiscal year. Net revenues for the six
months ended March 31, 1997 increased 15% from the same period in 1996. This
increase in net revenues for the three and six months ended March 31, 1997 was
due to a increase of proprietary networking and clock management products,
partially offset by lower average selling prices. 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 introduce and sell new products. Additionally, the Company
seeks to increase unit sales of existing products, principally by reducing
prices in conjunction with cost reduction programs. 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.
Gross margin was 42% of net revenues in the second quarter of fiscal
1997 as compared to 43% in the second quarter of fiscal 1996. The lower margins
were principally due to changes in product mix, absorption of fixed costs at QSA
acquired in February 1996, and lower average selling prices on certain logic and
memory products, which were offset in part by the sale of higher margin
networking and clock management products and the Company's cost reduction
programs. The gross margin for the six months ended March 31, 1997 was 42%
compared to 44% for the six months ended March 31, 1996. The decrease was mainly
due to lower average selling prices 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 also 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 16% of net
revenues in the second quarter of fiscal 1997 as compared to $1.5 million or 14%
of net revenues in the second quarter of fiscal 1996. Research and development
expenses were $4.2 million or 16% of net revenues for the six months ended March
31, 1997 as compared to $3.0 or 13% of net revenues for the six months ended
March 31, 1996. This increase for the three and six months ended March 31, 1997,
<PAGE>
was mainly the result of costs associated with the development of new products
and the added costs of the development group located at QSA. The Company expects
that its research and development expenses will increase, although such expenses
may vary as a percentage of net revenues in future periods. The Company believes
that the continued development of its process technology and new products and
its continued investment in research and development to maintain a strong
technological position in the industry.
Sales and marketing expenses were $1.9 million or 14% of net revenues
in the second quarter of 1997, as compared to $1.9 million or 18% of net
revenues in the second quarter of fiscal 1996. There was no increase in total
selling expenses, however, sales commissions increased as a result of higher net
revenues, but were offset by a decrease in advertising and promotional expenses
for the three months ended March 31, 1997 compared to prior years. Sales and
marketing expenses were $3.7 million or 14% of net revenues for the six months
ended March 31, 1997 as compared to $3.6 million or 16% of net revenues for the
six months ended March 31, 1996. The increase in selling expenses was mainly due
to increased sales commissions as a result of higher revenues. 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 net revenues in future periods.
However, there can be no assurance that net revenues will grow at the same rate
as expenditures for sales and marketing are incurred.
General and administrative expenses were $1.0 million or 7% of total
revenues in the first quarter of fiscal 1997, as compared to $1.0 million or 10%
of total revenues in the first quarter of fiscal 1996. General and
administrative expenses were $1.9 or 7% of net revenues for the six months ended
March 31, 1997 as compared to $1.9 or 9% of net revenues for the six months
ended March 31, 1996. Total general and administrative expenses for the three
and six month period ending March 31, 1997 has remained flat compared to the
prior years three and six month period.
Interest expense, net of interest income, was $84,000 during the three
months ended March 31, 1997 compared to net interest income of $68,000 during
the second quarter of fiscal 1996. Net interest expense of $167,000 compared to
net interest income of $239,000 for the six months ended March 31, 1996 and
1996, respectively. For the three and six months ended March 31, 1997, interest
expense was due to $5.0 million of cash used for the purchase of AWAM assets
(QSA) in February 1996, increased interest expense associated with the increase
in notes payable 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%. This rate is based
on the estimated annual tax rate complying with Statement of Financial
Accounting Standards No. 109 "Accounting for Income Taxes".
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, and the inability to keep production at a high level;
<PAGE>
(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 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, and during fiscal 1997, the Company commenced
shipments of its advanced CMOS fast Ethernet products. 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 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.
During fiscal 1997, the Company commenced shipping its advanced CMOS fast
Ethenet 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'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.
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.
<PAGE>
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 operating results.
Raw materials essential to the Company's wafer fabrication business are
generally available from multiple sources and the Company 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.
Additionally, a substantial amount of the wafers for the Company's
semiconductor products are fabricated by Seiko Instruments Inc. ("Seiko"), Ricoh
Corporation ("Ricoh"), 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 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
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.
<PAGE>
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 44% of the Company's
net revenues in the second quarter of fiscal 1997 as compared to 36% in the
second quarter of fiscal 1996. Sales outside of North America for the first six
months of fiscal 1997 were 44% of net revenues as compared to 36% for the first
six months 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 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.
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. Loss of one or more of the
Company's current customers could materially and adversely affect the Company's
business, operating results and financial condition. In addition, the Company
has experienced and may continue to experience lower margins on sales to
significant customers as a result of volume pricing arrangements.
The Company markets and distributes its products primarily through
manufacturers' representatives and independent distributors. Domestic
distributors accounted for approximately 23% of the Company's net revenues
during the second quarter of fiscal 1997 and 34% in the second quarter of fiscal
1996. Domestic distributors accounted for approximately 21% of the Company's net
revenues during the first six months of fiscal 1997 and 28% of net revenues
during the first six months 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.
<PAGE>
The semiconductor industry has historically been cyclical and subject to
significant economic downturns at various times and has been characterized by
diminished product demand, accelerated erosion of ASPs and over capacity. In
addition, the end-markets for systems that incorporate the Company's products
are characterized by rapidly changing technology and evolving industry
standards. The Company may experience substantial period-to-period fluctuations
in future operating results due to general semiconductor industry conditions,
overall economic conditions or other factors.
The Company's earnings and stock price have been, and may be subject to
significant volatility, particularly on a quarterly basis. Any shortfall in
revenue, gross margins or earnings from expected levels could have an immediate
and significant adverse effect on the trading price of the Company's stock in
any given period. The Company may not learn of, or be able to confirm revenue,
gross margin or earnings shortfalls until late in the quarter, or following the
end of the quarter, because a significant portion of the Company's revenue in a
quarter typically is shipped in the last few weeks of that quarter. In addition,
future announcements concerning the Company or its competitors, including
technological innovations, new product introductions, governmental regulations,
litigation, or changes in earnings estimates by analysts, may cause the market
price of the Company's stock to fluctuate substantially. Stock prices for many
technology companies fluctuate widely for reasons that may be unrelated to
operating results, such as general economic, political and market conditions.
The Company's stock price is also subject to potentially large volatility due to
the very low trading volumes of the Company's stock on most days since the
initial public offering of the Company's stock on November 17, 1994. In
addition, this low trading volume may continue and could affect the ability of
shareholders to sell their shares.
Liquidity and Capital Resources
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 Company received $3.0 million of the total financing in December 1996. In
March 1997, the Company decided not to sell, and one of the investors agreed not
to buy $2.0 million of the notes. The $3.0 million of notes issued by the
Company were converted into 439,758 shares of the Company's common stock. 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. Needham & Company received a 1% placement fee upon
completion of the transaction.
During the first six months ended March 31, 1997 the Company generated $1.1
million in cash from operating activities compared to $569,000 during the first
six months of fiscal 1996. Cash used in investing activities during the first
six months of fiscal 1997 totaled $3.2 million compared to $2.4 million in the
first six months of fiscal 1996. The latter reflected mainly the acquisition of
equipment for the wafer fab facility, offset by the proceeds from the sale of
short-term investments. Proceeds provided by financing activities of $2.4
million for the first six months of 1997 were primarily from the receipt of $2.9
million from the completion of the private placement, net of issuance costs in
December 1996. See Note 4 of Notes to Condensed Consolidated Financial
Statements. Financing activities for the first six months of fiscal 1996 used
cash of $8,000 primarily due to the payment on long-term debt, offset by the
sale of stock.
On March 28, 1996, the Company entered into a leasing agreement with
Kanematsu USA Inc., an affiliate of Kanematsu Semiconductor Corporation, a
shareholder of the Company, to finance up to $8.2 million at a rate of 8.5% of
wafer fabrication equipment for installation at QSA. In April 1997, Kanematsu
agreed to allow the Company to borrow an additional $2.3 million at 9.25%. As of
March 31, 1997, the Company had approximately $7 million of equipment leases
outstanding under the agreement.
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
In November 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 received a 1% placement fee upon completion of the
transaction. The notes were 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 $3.0 million
of the total financing as of December 31, 1996 and converted
the notes issued for such amount into 439,758 shares of the
Company's common stock. In March 1997, the Company decided not
to sell, and one of the investors agreed not to buy $2 million
of the notes. The Company is relied 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.
Item 3 Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
The annual meeting of shareholders was held on
February 21, 1997 at which directors were elected to serve for
the ensuing year and until their successors are elected and
qualified, approve the amendments to the 1995 Stock Option
Plan to increase the number of shares available for issuance
thereunder by 500,000 shares, to further increase the option
pool by up to 200,000 shares through the repurchase of the
common stock by the Company in the open market and to require
that all nonstatutory options granted under the 1995 Stock
Option Plan must equal at least 100% of the fair market value
of the common stock of the Company on the date of grant were
approved, and the appointment of Ernst and Young LLP as the
Company's independent auditors for the fiscal year ending
September 30, 1997 was ratified.
The voting results were as follows:
Election of Directors:
Votes For Votes Withheld
Chun P. Chiu 5,434,680 31,991
R. Paul Gupta 5,433,903 32,768
Andrew J.S. Kang 5,438,280 28,391
Manohar Malwah 5,434,980 31,691
Robert L. Puette 5,438,280 28,391
Massaharu Shinya 5,436,330 30,341
David D. Tsang 5,452,630 14,041
<PAGE>
Approval of the amendments to the 1995 Stock Option Plan and
the reservation of 500,000 shares of common stock for issuance
thereunder and repurchase of 200,000 shares of common stock to
be used as an additional increase to the option pool.
Votes For Votes Against Votes Abstain Broker Non-Vote
2,819,704 470,741 19,153 2,157,073
Ratification of appointment of Ernst and Young LLP as
Independent Auditors for fiscal year ending September 30, 1997.
Votes For Votes Against Votes Abstain
5,442,078 13,593 11,000
Item 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
The Company did not file any reports on Form 8-K
during the quarter.
<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: May 13, 1997 By: /s/ R. Paul Gupta
-------------------
R. Paul Gupta
Chief Executive Officer
Date: May 13, 1997 By: /s/ John P. Goldsberry
------------------------
John P. Goldsberry
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)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
March 31, March 31,
------------------------------ ------------------------------
1997 1996 1997 1996
------------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
Net income $372 $467 $503 $1,324
============= ============ ============ =============
Computation of common and common
equivalents
shares outstanding
Common Stock 5,997 5,562 5,830 5,530
Options and warrants 617 3 570 194
------------- ------------ ------------ -------------
Shares used in computing per share amounts 6,614 5,565 6,400 5,724
============= ============ ============ =============
Net income per share $0.06 $0.08 $0.08 $0.23
============= ============ ============ =============
</TABLE>
- ----------
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
<LEGEND>
(Replace this text
</LEGEND>
<CIK> 0000869886
<NAME> Financial Data Schedule
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-1-1996
<PERIOD-END> MAR-31-1997
<EXCHANGE-RATE> 1,000
<CASH> 5,210
<SECURITIES> 3,840
<RECEIVABLES> 11,348
<ALLOWANCES> (127)
<INVENTORY> 13,544
<CURRENT-ASSETS> 36,581
<PP&E> 11,221
<DEPRECIATION> (14,011)
<TOTAL-ASSETS> 59,710
<CURRENT-LIABILITIES> 18,991
<BONDS> 0
7,150
0
<COMMON> 6
<OTHER-SE> 34,030
<TOTAL-LIABILITY-AND-EQUITY> 59,710
<SALES> 25,647
<TOTAL-REVENUES> 25,647
<CGS> 14,927
<TOTAL-COSTS> 24,707
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 4,000
<INTEREST-EXPENSE> (167)
<INCOME-PRETAX> 773
<INCOME-TAX> 270
<INCOME-CONTINUING> 503
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 503
<EPS-PRIMARY> 0.08
<EPS-DILUTED> 0.08
</TABLE>
