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, 1998
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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, 1998 was 7,417,460.
<PAGE>
Quality Semiconductor, Inc.
Form 10-Q for the Quarter Ended March 31, 1998
INDEX
PART I. FINANCIAL INFORMATION Page
Item 1 Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of March 31, 1998 and
September 30, 1997 3
Condensed Consolidated Statements of Operations for the three
months and six months ended March 31, 1998 and March 31, 1997 4
Condensed Consolidated Statements of Cash Flows for the three
and six months ended March 31, 1998 and March 31, 1997 5
Notes to Condensed Consolidated Financial Statements 6
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operation 8
PART II OTHER INFORMATION
Item 2 Changes in Securities and use of Proceeds 15
Item 4 Submission of Matters to a Vote of Security Holders 15
Item 5 Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
<PAGE>
PART I. FINANCIAL INFORMATION
Quality Semiconductor, Inc.
Condensed Consolidated Balance Sheets
(In thousands, except par values)
<TABLE>
<CAPTION>
March 31, September 30,
1998 1997 (1)
----------------- ----------------
(Unaudited)
ASSETS
Current Assets:
<S> <C> <C>
Cash and cash equivalents $5,638 $9,403
Short-term investments 1,500 3,656
Accounts and other receivables, net 8,570 8,748
Inventories 17,305 17,689
Other current assets 6,468 5,327
----------------- ----------------
Total current assets 39,481 44,823
Property and equipment, net 22,498 22,859
Goodwill and other assets 1,664 2,150
================= ================
Total assets $63,643 $69,832
================= ================
LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities:
Accounts payable $6,972 $5,711
Accrued liabilities 2,177 2,676
Deferred income on shipments to distributors 3,101 2,995
Redeemable preference shares of subsidiary - 3,982
Line of credit 1,400 -
Notes payable to related party due within one year 2,477 1,684
----------------- ----------------
Total current liabilities 16,127 17,048
Notes payable to related party 5,438 7,202
Deferred tax liabilities 1,969 1,945
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 7,417 and 7,393 7 7
Additional paid-in-capital 41,648 41,600
Retained earnings (accumulated deficit) (1,468) 2,221
Deferred compensation (78) (191)
----------------- ----------------
Total shareholders' equity 40,109 43,637
================= ================
Total liabilities and shareholders' equity $63,643 $69,832
================= ================
</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 Statements of Operations
(Unaudited)
(In thousands, except per share data)
<TABLE>
Three months ended Six months ended
March 31, March 31,
------------------------------
---------------- - ------------------
1998 1997 1998 1997
------------- ------------- ---------------- ------------------
<CAPTION>
<S> <C> <C> <C> <C>
Net revenues $16,096 $13,302 $34,630 $25,647
Cost of revenues 11,176 7,689 24,596 14,927
------------- ------------- ---------------- ------------------
Gross margin 4,920 5,613 10,034 10,720
Operating expenses:
Research and development 2,716 2,104 5,436 4,214
Sales and marketing 2,394 1,896 4,786 3,684
General and administrative 1,336 957 2,707 1,882
------------- ------------- ---------------- ------------------
Total operating expenses 6,446 4,957 12,929 9,780
------------- ------------- ---------------- ------------------
Operating income (loss) (1,526) 656 (2,895) 940
Interest, net (218) (84) (371) (167)
------------- ------------- ---------------- ------------------
Income (loss) before provision for income (1,744) 572 (3,266) 773
taxes
Provision for income taxes 533 200 - 270
============= ============= ================ ==================
Net income (loss) ($2,277) $372 ($3,266) $503
============= ============= ================ ==================
Net income (loss) per share - Basic ($0.31) $0.06 ($0.44) $0.09
============= ============= ================ ==================
Net income (loss) per share - Diluted ($0.31) $0.06 ($0.44) $0.08
============= ============= ================ ==================
Shares used in computing net income (loss)
per share - Basic 7,407 5,997 7,395 5,830
============= ============= ================ ==================
Shares used in computing net income (loss)
per share - Diluted 7,407 6,614 7,395 6,400
============== ============= ================ =================
See accompanying notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
Quality Semiconductor, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
Six months ended
March 31,
---------------------------
1998 1997
---------- -------------
Operating activities
Net income (loss) $(3,266) $503
Adjustments to reconcile net income (loss) to net
cash
provided by operating activities:
Depreciation and amortization 3,668 2,885
Accretion on preference shares 48 157
Deferred income taxes 24 (11)
Deferred compensation amortization 113 114
Changes in operating assets and liabilities 240 (2,562)
---------- -------------
Net cash provided by operating activities 827 1,086
Investing activities
Capital expenditures (3,469) (1,841)
Sales of short-term investments, net 2,156 (1,437)
Deposits and other assets 226 117
---------- -------------
Net cash used in investing activities (1,087) (3,161)
Financing activities
Principal payments on long-term debt (971) (498)
Proceeds from notes payable, net of issuance costs - 2,850
Proceeds from line of credit 1,400 -
Payment of peference shares (3,982) -
Proceeds from issuance of stock, net of repurchases 48 3
---------- -------------
Net cash provided by (used in) financing activities (3,505) 2,355
---------- -------------
Net increase (decrease) in cash and cash equivalents (3,765) 280
Cash and cash equivalents at beginning of period 9,403 4,930
========== =============
Cash and cash equivalents at end of period $5,638 $5,210
========== =============
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
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, 1997 annual financial
statements.
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, 1998 may not
necessarily be indicative of the results for the fiscal year ending September
30, 1998.
Note 2. Inventories
Inventories consisted of (in thousands):
March 31, September 30,
1998 1997
---------------- ----------------
Raw Materials $7,148 $5,421
Work-in-process 2,339 3,770
Finished goods 7,818 8,498
================ ================
$17,305 $17,689
================ ================
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. 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.
At March 31, 1998, inventory of one of the Company's inventory was at a
high level relative to its reenue for the three months ended March 31, 1998.
However, management has developed a program to reduce the inventory to desired
levels over the near term, and believes no loss will be incurred on its
disposition. At this time, management cannot estimate a range of amounts of loss
that could occur if the program is not successful.
<PAGE>
Note 3. Net Income (Loss) Per Share
The following table sets forth the computation of basic and diluted net
income (loss) per share.
<TABLE>
Three months ended Six months ended
March 31, March 31,
---------------- -- -------------- ----------- -- -------------
1998 1997 1998 1997
<CAPTION>
<S> <C> <C> <C> <C>
---------------- -------------- ----------- -------------
Numerator - Net Income (loss) ($2,277) $372 ($3,266) $503
Denominator for Basic net income (loss)
per 7,407 5,997 7,395 5,830
share - Weighted average shares
Effect of dilutive securities -
employee stock options - 617 - 570
---------------- -------------- ----------- -------------
Denominator for diluted net income (loss) 7,407 6,614 7,395 6,400
per share
================ ============== =========== =============
Basic net income (loss) per share ($.31) $0.06 ($0.44) $0.09
================ ============== =========== =============
Diluted earnings (loss) per share ($.31) $0.06 ($0.44) $0.08
================ ============== =========== =============
</TABLE>
Note 4. Income Taxes
The Company has not recognized a tax benefit for its operating losses
incurred during the six months ended march 31, 1998. The provision for income
taxes recognized for the three months ended March 31, 1998, represents the
reversal of the tax benefit recognized in the Company's first quarter of fiscal
1998. Recognition of the tax benefit of the losses is depenent upon the Company
generating sufficient earnings.
Note 5. Impact of Recently Issued Accounting Standards
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 (revenues, 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.
<PAGE>
QUALITY SEMICONDUCTOR, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following information should be read in conjunction with the
unaudited interim financial statements and the notes thereto indcluded in Item 1
of this Quarterly Report on Form 10-Q, the Management's Discussion and Analysis
of Finacial Conditions and Results of Operations contained in the Company's 10-K
filed with the Securities and Exchange Commission on December 19, 1997 and
subsequent filings with the Securities and Exchange Commission.
This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 2E 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
Net revenues for the quarter ended March 31, 1998 increased 21% from the
corresponding period in the prior fiscal year. Net revenues for the six months
ended March 31, 1998 increased 35% from the same period in fiscal1996. This
increase in net revenues for the three and six months ended March 31, 1998 was
due to an increase in sales of proprietary networking, QuickSwitch 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
maintain or increase revenues, therefore, the Company must introduce and sell
new products at higher prices and increase unit sales of existing products,
primarily through reducing prices in conjunction with cost reduction programs.
There can be no assurance, however, that the Company will be successful in these
efforts, that the demand for semiconductor products will continue at present
levels or that the Company will be able to sustain its current market share or
historic rate of revenue growth.
Gross margin was 31% of net revenues in the second quarter of fiscal 1998
as compared to 42% in the second quarter of fiscal 1997. The lower margins were
principally due to changes in product mix and lower average selling prices which
were offset in part by the sale of higher margin clock management products.
Higher than expected testing costs and related lower than expected yields for
the Company's networking products also contributed to the lower margins. The
gross margin for the six months ended March 31, 1998 was 29% compared to 42% for
the six months ended March 31, 1997. This decrease also reflected the same
factors affecting the decrease in margins for the second quarter of fiscal 1998
from the second quarter of fiscal 1997. 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 increased 29% for both the three months
and six months ended March 31, 1998 over the same periods ending March 31, 1997.
These increases were due primarily to the increase in product and process
development. 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 is needed to maintain a competitive technological position in the
industry.
<PAGE>
Sales and marketing expenses increased 26% for the second quarter of fiscal
1998 over the same period of fiscal 1997. This increase was mainly due to
increased sales commissions as a result of the higher revenue in the second
quarter of fiscal 1998 and increased advertising and promotional expense. Sales
and marketing expenses increased 30% for the six months ended March 31, 1998 as
compared to the six months ended March 31, 1997. The increase in selling
expenses for the six month period was also mainly due to increased sales
commissions as a result of higher revenues and increased advertising and
promotional expense. 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 increased 40% for the second quarter of
fiscal 1998 over the second quarter of fiscal 1997 and 44% for the six month
period ended March 31, 1998 over the same period of a year ago. The increases
for both the three month and six month periods were due mainly to increased
legal expenses and higher payroll related expenses.
Interest expense, net of interest income, was $218,000 during the three
months ended March 31, 1998 compared to $84,000 during the second quarter of
fiscal 1997 and $371,000 for the six month period ending March 31, 1998 compared
to $167,000 for the same period of fiscal 1997. These increases were mainly due
to increased debt to Kanematsu for the purchase of wafer fabrication equipment
for Quality Semiconductor Australia ("QSA") and, interest on the redeemable
preference shares issued as part of the consideration for the purchase of QSA.
The Company has not recognized a tax benefit for its operating losses
incurred during the six months ended March 31, 1998. The provision for income
taxes recognized for the three months ended March 31, 1998, represents the
reversal of the tax benefit recognized in the Company's first quarter of fiscal
1998. Recognition of the tax benefit of the losses is depenent upon the Company
generating sufficient earnings.
Liquidity and Capital Resources
During the first six months ended March 31, 1998 the Company used $3.5
million in cash for financing activities compared to $2.4 million generated in
financing activities during the first six months of fiscal 1997. The increase in
cash used for financing activities was mainly due to the final payment of
preference shares in connection with the purchase of the wafer fabrication
facility in Australia. Cash provided by financing activities of $2.4 million in
the first six months of fiscal 1997 was mainly generated from the receipt of
$2.9 million from the completion of the private placement in December 1996. Cash
used in investing activities during the first six months of fiscal 1998 totaled
$1.1 million compared to $3.2 million in the first six months of fiscal 1997.
The former reflected mainly the purchase of property and equipment of $3.5
million offset by the sale of investments of $2.2 million.
The Company generated cash from operations and approximately $800,000, and
also borrowed $1.4 million against its $5.0 million unsecured line of credit to
meet capital equipment and other requirements. The Company is currently out of
compliance with certain loan covenants of this $5.0 million unsecured line of
credit, but it expects to receive a waiver with respect to such covenants. In
April 1998 the Company subsequently repaid the entire balance of $1.4 million
which was outstanding under the line of credit. If the Company is unable to
secure a waiver of such covenants or generate sufficient cash from operations
through fiscal 1998, the Company may need to seek additional capital from
external sources. There can be no assurance, however, that the Company will be
able to secure such additional capital or that the terms of such additional
financing will be comparable to the Company's current financing terms. In such
events the Company may be required to reduce its capital expenditure plans or
operations and its financial condition and results of operations could be
materially adversely affected.
<PAGE>
FACTORS THAT MAY AFFECT RESULTS
Factors Affecting Annual and Quarterly 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's operation of 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.
In addition, 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.
At March 31, 1998, the Company's inventory was at a high level relative to
its revenue for the three months ended March 31, 1998. However, management has
developed a program to reduce the inventory to desired levels over the near
term, and believes no loss will be incurred on its disposition. At this time,
management cannot estimate a range of amounts of loss that could occur if the
program is not successful.
Dependence on QSFCT, QuickSwitch and Networking Product Lines
A significant amount 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 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>
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. The Company has generated a significant amount
of its revenue from these products since their introduction. However, 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 and average selling prices and
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. The Company completed the qualification process during the quarter
ended March 31, 1998 and the Company believes the performance of these products
meet specifications, however there is no assurance that customers will not
cancel existing orders. 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.
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.
Risk 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 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
<PAGE>
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 amount of the wafers for the Company's semiconductor products
are fabricated by Taiwan Semiconductor Manufacturing Company Ltd. ("TSMC") and a
limited number of wafers are manufactured by 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
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.
Risks of International Purchases and Sales
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 historically have been substantial. 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.
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.
<PAGE>
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 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 adverse effect on the
Company's operating results.
Year 2000 Compliance
The Company is currently evaluating the software and computer systems it
uses in order to ensure compliance with Year 2000 issues. This evaluation, and
any corrective actions required, is estimated to be completed no later than
December 31, 1998. The Company does not expect to encounter significant problems
or expect that material expenditures will be required to comply with Year 2000
issues. These expectations are based primarily on the fact that the Company
purchases all business software from third party vendors.
Specific actions to be taken include: reviewing all software used and
assessing the vendors' plans to comply with Year 2000; testing of all hardware
to ensure its ability to recognize dates after 1999; and contacting significant
suppliers to determine their ability to comply with Year 2000.
The expectations of the findings of this project and the date on which the
Company believes it will be completed are based on management's best estimates.
However, there can be no guarantee that these expectations will be achieved and
actual results could differ materially.
Semiconductor Economic Conditions
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
<PAGE>
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 the 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>
PART II OTHER INFORMATION
Item 1. Legal Proceedings - Not Applicable
Item 2. Changes in Securities and Use of Proceeds
In February 1998, the Board of Directors of the
Company unanimously approved the grant of a non-statutory
option to purchase up to 100,000 shares of Common Stock (the
"Option Shares") to Dr. David Sear in connection with Dr. Sear
accepting employment as the Chief Operation Officer of the
Company. The options were priced at $4.00 per share and were
not granted pursuant to an established employee incentive
plan. To the extent that Dr. Sear exercises any of the options
without an effective Registration Statement on Form S-8
covering the Option Shares, the securities issued to Dr. Sear
will be unregistered securities. The option grant was deemed
to be exempt from registration under the Securities Act of
1933, as amended (the "Securities Act") under Section 4(2) of
the Securities Act as a transaction not involving any public
offering. Dr. Sear represented his intentions to acquire the
options and the Option Shares (if unregistered) for investment
only and not with a view to or for sale in connection with any
distribution thereof. The options are non-transferable and the
Option Shares, if unregistered, shall bear appropriate
legends. Dr. Sear had adequate access to information about the
Company through his relationship with the Company.
Item 3 Defaults Upon Senior Securities - Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
The annual meeting of shareholders was held on
February 27, 1998 at which directors were elected to serve for
the ensuing year and until their successors are elected and
qualified, amendments were approved to the 1995 Stock Option
Plan to increase the number of shares available for issuance
thereunder by 340,000 shares and to increase the number of
shares of Common Stock reserved for issuance under the 1993
Employee Stock Purchase Plan by 100,000 shares, and the
appointment of Ernst and Young LLP as the Company's
independent auditors for the fiscal year ending September 30,
1998 was ratified.
The voting results were as follows:
Election of Directors:
Votes For Votes Withheld
Chun P. Chiu 5,409,813 928,756
R. Paul Gupta 5,409,813 928.759
Andrew J.S. Kang 5,409,913 928,656
Robert L. Puette 5,409,913 928,656
Masaharu Shinya 5,409,913 928,656
David D. Tsang 5,409,813 928,756
<PAGE>
Approval of the amendment to the 1995 Stock Option Plan to increase the number
of shares of Common Stock reserved for issuance thereunder by 340,000 shares.
Votes For Votes Against Votes Abstain Broker Non-Vote
2,078,301 1,406,236 14,924 2,839,108
Approval of the amendment to the 1993 Employee Stock Purchase Plan to increase
the number of shares of Common Stock reserved for issuance thereunder by 100,000
shares.
Votes For Votes Against Votes Abstain Broker Non-Vote
3,056,377 470,016 32,649 2,779,527
Ratification of appointment of Ernst and Young LLP as Independent Auditors for
fiscal year ending September 30, 1998.
Votes For Votes Against Votes Abstain
6,316,554 8,485 13,530
Item 5. Other Information
On April 22, 1998, the Company announced that Stephen H. Vonderach, 64, had
been named Vice President of Finance and Chief Financial Officer. Further
details on this announcement are contained in the Company's press release dated
April 22, 1998 attached as an exhibit hereto and incorpoirated by reference
herein.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. 27.1 - Financial Data Schedule, Six Months Ended
March 31, 1998
Exhibit No. 27.1.1 - Financial Data Schedule, Three Months Ended
December 31, 1996
Exhibit No. 27.1.2 - Financial Data Schedule, Six Months Ended
March 31, 1997
Exhibit No. 27.1.3 - Financial Data Schedule, Nine Months Ended
June 30, 1997
Exhibit 99 - Quality Semiconductor, Inc. Press Release dated
April 22, 1998
(b) Reports on Form 8-K
On March 25,1998 the Company filed a report on Form 8-K reporting
under Item 5 thereof, regarding the financial results of the second
quarter of fiscal 1998.
<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 7, 1998 By: /s/ R. Paul Gupta
-------------------
R. Paul Gupta
Chief Executive Officer
Date: May 7, 1998 By: /s/ Stephen H. Vonderach
--------------------------
Stephen H. Vonderach
Chief Financial Officer
Chief Accounting Officer
<PAGE>
Exhibit 27.1
QUALITY SEMICONDUCTOR, INC.
Financial Data Schedule
(In thousands, except per share data)
(Unaudited)
Fiscal Year End September 30, 1998
Period Beginning October 1, 1997
Period Ending March 31, 1998
Cash and cash items $5,638
etable securities 1,500
Notes and accounts receivable - trade 9,089
Allowances for doubtful accounts (519)
Inventory 17,305
Total current assets 39,481
Property, plant and equipment 40,080
Accumulated depreciation (19,582)
Total assets 63,643
Total current liabilities 16,127
Bonds, mortgages and similar debt 0
Preferred stock - mandatory redemption 0
Preferred Stock - non-mandatory redemption 0
Common Stock 7
Other Stockholders' Equity 40,102
Total liabilities and stockholders' equity 63,643
Net sales of tangible products 34,630
Total revenue 34,630
Cost of tangible goods sold 24,596
Total costs and expenses applicable to sales and revenue 12,929
Other costs and expenses 0
Provision for doubtful accounts and notes 0
Interest and amortization of debt discount (371)
Income before taxes (3,266)
Income tax expense 0
Income/loss continuing operations (3,266)
Discontinued operations 0
Extraordinary items 0
Cumulative effect-changes in accounting principles 0
Net income or loss (3,266)
Earnings per share -basic (0.31)
Earnings per share - diluted (0.31)
<PAGE>
QUALITY SEMICONDUCTOR, INC. Exhibit 27.1.1
Financial Data Schedule
(In thousands, except per share data)
Fiscal Year End September 30, 1997
Period Beginning October 1, 1996
Period Ending December 31, 1996
Cash and cash items $6,890
Marketable securities 2,010
Notes and accounts receivable - trade 7,916
Allowances for doubtful accounts (257)
Inventory 14,601
Total current assets 34,496
Property, plant and equipment 32,931
Accumulated depreciation (12,672)
Total assets 57,634
Total current liabilities 13,449
Bonds, mortgages and similar debt 0
Preferred stock - mandatory redemption 4,213
Preferred Stock - non-mandatory redemption 0
Common Stock 6
Other Stockholders' Equity 31,169
Total liabilities and stockholders' equity 57,634
Net sales of tangible products 12,345
Total revenue 12,345
Cost of tangible goods sold 7,238
Total costs and expenses applicable to sales and revenue 12,061
Other costs and expenses (83)
Provision for doubtful accounts and notes 0
Interest and amortization of debt discount 0
Income before taxes 201
Income tax expense 70
Income/loss continuing operations 131
Discontinued operations 0
Extraordinary items 0
Cumulative effect-changes in accounting principles 0
Net income or loss 131
Earnings per share - basic 0.02
Earnings per share - diluted 0.02
<PAGE>
QUALITY SEMICONDUCTOR, INC. Exhibit 27.1.2
Financial Data Schedule
(In thousands, except per share data)
(Unaudited)
Fiscal Year End September 30, 1997
Period Beginning October 1, 1996
Period Ending March 31, 1997
Cash and cash items $5,210
Marketable securities 3,840
Notes and accounts receivable - trade 11,348
Allowances for doubtful accounts (127)
Inventory 13,544
Total current assets 36,581
Property, plant and equipment 11,221
Accumulated depreciation (14,011)
Total assets 59,710
Total current liabilities 18,991
Bonds, mortgages and similar debt 0
Preferred stock - mandatory redemption 7,150
Preferred Stock - non-mandatory redemption 0
Common Stock 6
Other Stockholders' Equity 34,030
Total liabilities and stockholders' equity 59,710
Net sales of tangible products 25,647
Total revenue 25,647
Cost of tangible goods sold 14,927
Total costs and expenses applicable to sales and revenue 24,707
Other costs and expenses 0
Provision for doubtful accounts and notes 4,000
Interest and amortization of debt discount (167)
Income before taxes 773
Income tax expense 270
Income/loss continuing operations 503
Discontinued operations 0
Extraordinary items 0
Cumulative effect-changes in accounting principles 0
Net income or loss 503
Earnings per share - basic 0.09
Earnings per share - diluted 0.08
<PAGE>
QUALITY SEMICONDUCTOR, INC. Exhibit 27.1.3
Financial Data Schedule
(In thousands, except per share data)
(Unaudited)
Fiscal Year End September 30, 1997
Period Beginning October 1, 1996
Period Ending June 30, 1997
Cash and cash items 10,173
Marketable securities 4,267
Notes and accounts receivable - trade 14,839
Allowances for doubtful accounts (136)
Inventory 15,671
Total current assets 48,562
Property, plant and equipment 35,653
Accumulated depreciation (15,011)
Total assets 71,686
Total current liabilities 20,992
Bonds, mortgages and similar debt 0
Preferred stock - mandatory redemption 7,232
Preferred Stock - non-mandatory redemption 0
Common Stock 7
Other Stockholders' Equity 44,202
Total liabilities and stockholders' equity 71,686
Net sales of tangible products 42,189
Total revenue 42,189
Cost of tangible goods sold 24,414
Total costs and expenses applicable to sales and revenue 24,414
Other costs and expenses 15,369
Provision for doubtful accounts and notes 10
Interest and amortization of debt discount (268)
Income before taxes 2,138
Income tax expense 748
Income/loss continuing operations 1,390
Discontinued operations 0
Extraordinary items 0
Cumulative effect-changes in accounting principles 0
Net income or loss 1,390
Earnings per share - basic 0.23
Earnings per share - diluted 0.21
Exhibit 99
FOR: QUALITY SEMICONDUCTOR, INC.
APPROVED BY: R. Paul Gupta
President and Chief Executive Officer
Quality Semiconductor, Inc.
(408) 450-8000
CONTACTS: Morgen-Walke Associates, Inc.
Carolyn Bass, Jim Byers, Doug Sherk
(415) 296-7383
Sandra Badurina, Deborah Szajngarten
(212) 850-560
FOR IMMEDIATE RELEASE
QUALITY SEMICONDUCTOR NAMES CHIEF FINANCIAL OFFICER
SANTA CLARA, CA -- (April 22, 1998) -- Quality Semiconductor, Inc. (Nasdaq:QUAL)
today announced that Stephen H. Vonderach, 64, has been named Vice President of
Finance and Chief Financial Officer.
Mr. Vonderach was previously Chief Financial Officer of iX Micro, a private
company and a leading provider of high-end Macintosh graphics and designer of
GUI chips. He also previously served as Vice President of Finance and Chief
Financial Officer of Quality Semiconductor from July, 1993 to March, 1997.
Mr. Vonderach brings extensive financial experience gained during his 32
year career in the semiconductor industry. Prior to serving at iX Micro and
Quality Semiconductor, he was Vice President of Finance and Treasurer at Appian
Technology Inc., a manufacturer and marketer of Very-Large-Scale-Integrated
(VLSI) circuits. Appian was formerly known as ZyMOS Corporation. In addition,
Mr. Vonderach served as Manager, Budgets and Planning at National Semiconductor
Corporation (NYSE:NSM). He has also held senior management positions at Verbatim
Corporation, Monsanto Company (NYSE:MTC) and American Microsystems, Inc.
Mr. Vonderach has an M.B.A. from Pepperdine University School of Business
Management and was Charter President of the Silicon Valley Chapter of the
National Association of Accountants.
"Steve brings years of solid experience and success in all aspects of
finance, as well extensive knowledge of Quality Semiconductor," stated R. Paul
Gupta, the Company's President and Chief Executive Officer. "We believe his
experience within the semiconductor industry and his prior history with the
Company will be of tremendous benefit to Quality as we pursue our objectives in
the coming year."
Quality Semiconductor, Inc. (QSI) designs, develops and markets
high-performance logic and networking semiconductor products. The company
targets systems manufacturers principally in the networking, personal computer
and workstation markets. The company's logic products include the 3.3-volt and
5-volt QSFCT families of high-speed, low-noise interface logic devices, the
QuickSwitch family of high-speed, low-resistance bus switches, a family of
low-skew clock management products, a family of analog switch devices, and new
JTAG products designed to allow board-level testing of complex products. QSI's
networking products include two Fast Ethernet CMOS transceivers that provide
high integration solutions for the adapter, repeater, switch and card bus
markets.
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