UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(Amendment No. 1)
-------
X QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
- -------
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1998
- -------
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
- -------
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 February
1, 1999 was 7,551,753.
<PAGE>
Quality Semiconductor, Inc.
Form 10-Q for the Quarter Ended December 31, 1998
INDEX
PART I. FINANCIAL INFORMATION
Item 1 - Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of December 31, 1998
and September30, 1998 3
Condensed Consolidated Statements of Operations and
Comprehensive Income for the three months ended December 31,
1998 and December 31, 1997 4
Condensed Consolidated Statements of Cash Flows for the
three months ended December 31, 1998 and December 31, 1997 5
Notes to Condensed Consolidated Financial Statements 6
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
Item 3 - Quantitative and Qualitative Disclosures About Market Risk 19
PART II. OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K 20
(a) Exhibits
(b) Reports on Form 8-K
Signatures 21
- 2 -
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
<TABLE>
Quality Semiconductor, Inc.
Condensed Consolidated Balance Sheets
(In thousands, except par values)
<CAPTION>
December 31, September 30,
1998 1998 (1)
-------- --------
Unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents ...................... $ 6,274 $ 5,938
Short-term investments ......................... -- 1,900
Accounts and other receivables, net ............ 4,815 5,852
Inventories .................................... 6,765 8,210
Other current assets ........................... 1,174 1,356
-------- --------
Total current assets ........................ 19,028 23,256
Property and equipment, net ........................ 19,111 21,787
Goodwill and other assets .......................... 478 1,270
-------- --------
Total assets ................................ $ 38,617 $ 46,313
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ..................................$ 5,624 $ 4,432
Accrued liabilities ............................... 4,030 3,775
Deferred income on shipments to distributors ...... 2,059 2,972
Notes payable to related party due within one year 2,544 2488
Current portion - capital lease obligations ....... 1,228 378
-------- --------
Total current liabilities ...................... 15,485 14,045
Notes payable to related party ........................ 3,510 4,166
Long-term portion - capital lease obligations ......... 38 980
Deferred tax liabilities .............................. 171 832
Shareholders' equity:
Preferred stock, $.001 par value: Authorized 1,000;
Issued and outstanding - none ................ -- --
Common stock, $.001 par value, Authorized - 30,000
Issued and outstanding 7,525 and 7,503 ....... 8 8
Additional paid-in-capital ........................ 41,871 41,820
Retained earnings ................................. (20,174) (12,956)
Accumulated other comprehensive income (loss) ..... (2,292) (2,582)
-------- --------
Total shareholders' equity .................... 19,413 26,290
-------- --------
Total liabilities and shareholders' equity ....$ 38,617 $ 46,313
======== ========
<FN>
See accompanying notes to condensed consolidated financial statements.
(1) The information in this column was derived from the Company's audited
financial statements.
</FN>
</TABLE>
- 3 -
<PAGE>
Quality Semiconductor, Inc.
Condensed Consolidated Statements of Operations and Comprehensive Income
(Unaudited)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended
December 31,
----------------------------
<S> <C> <C>
1998 1997
------- ------
Net revenues ............................... $ 10,646 $ 18,534
Cost of revenues ........................... 11,058 13,420
-------- --------
Gross margin ............................... (412) 5,114
Operating expenses:
Research and development ................. 3,370 2,720
Sales and marketing ...................... 1,859 2,392
General and administrative ............... 1,460 1,371
-------- --------
Total operating expenses ........ 6,689 6,483
-------- --------
Operating income (loss) .................... (7,101) (1,369)
Interest expense, net ...................... (117) (153)
-------- --------
Income (loss) before provision (benefit) for
income taxes ............................... (7,218) (1,522)
Provision (benefit) for income taxes ....... -- (533)
-------- --------
Net income (loss) .......................... (7,218) (989)
Other comprehensive income (loss):
Foreign currency translation adjustment .. 290 (270)
-------- --------
Comprehensive income (loss) ................ ($ 6,928) ($ 1,259)
======== ========
Net income (loss) per share - Basic ........ ($ 0.96) ($ 0.13)
======== ========
Net income (loss) per share - Diluted ...... ($ 0.96) ($ 0.13)
======== ========
Shares used in computing net income (loss)
per share - Basic .......................... 7,508 7,383
======== ========
Shares used in computing net income (loss)
per share - Diluted ........................ 7,508 7,383
======== ========
<FN>
See accompanying notes to condensed consolidated financial statements.
</FN>
</TABLE>
- 4 -
<PAGE>
Quality Semiconductor, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Three months ended
December 31,
------------------------
1998 1997
---------- --------
<S> <C> <C>
Operating activities
Net income (loss) .................................. ($7,218) ($ 989)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization .................. 3,786 2,151
Accretion on preference shares ................. -- 48
Deferred income taxes .......................... -- (113)
Deferred compensation amortization ............. -- 57
Changes in operating assets and liabilities .... 2,827 1,995
------- -------
Net cash provided by (used in) operating activities (605) 3,149
Investing activities
Capital expenditures .............................. (318) (1,807)
Sales of short-term investments, net .............. 1,900 1,498
Deposits and other assets ......................... -- 130
-------- --------
Net cash provided by (used in) investing activities 1,582 (179)
Financing activities
Principal payments on long-term debt .............. (692) (502)
Proceeds from issuance of stock, net of repurchases 51 (121)
-------- --------
Net cash used in financing activities ............. (641) (623)
-------- --------
Net increase in cash and cash equivalents ......... 336 2,347
Cash and cash equivalents at beginning of period .. 5,938 9,403
-------- -------
Cash and cash equivalents at end of period ........ $ 6,274 $ 11,750
======== ========
<FN>
See accompanying notes to condensed consolidated financial statements
</FN>
</TABLE>
- 5 -
<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
financial statements in the Company's Annual Report on Form 10-K for the
year ended September 30, 1998.
On November 1, 1998, the Company signed a definitive agreement to
merge with Integrated Device Technology, Inc. ("IDT"). Under the terms of
the agreement, each issued and outstanding share of the Company's Common
Stock will be exchanged for 0.6875 shares of Common Stock of IDT. The
Company will hold a special shareholders' meeting to approve the merger. If
the Company's shareholders approve the merger, the merger is planned to
close during the second calendar quarter of 1999.
The Company's principal source of funds for operations and capital
expenditures includes cash balances and cash flow from operations. Should
the proposed merger with IDT fail to be completed, these sources of funds
may be inadequate and the Company may be required to reduce or restructure
its operations and/or raise additional capital. Additional capital may not
be available to the Company at favorable terms. Additionally, any
restructuring of the Company's operations could result in charges,
including charges to recognize impairment of the Company's assets, that
could be material to the Company's financial position and results of
operations.
The functional currency of the Company's foreign subsidiary is the
Australian Dollar. Subsidiary financial statements are translated into U.S.
Dollars for consolidation.
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 preparation of the consolidated financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements. These estimates include provisions for excess and obsolete
inventory, sales return reserves and product warranty claims. Actual
results could differ materially from estimates. The Company's operating
results are subject to a variety of risks common to the semiconductor
industry, including bookings and shipment uncertainties, wafer yield
fluctuations, and price erosion, as well as general economic conditions.
The results of operations for the three months ended December 31, 1998
may not necessarily be indicative of the results for the fiscal year ending
September 30, 1999.
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):
<TABLE>
<CAPTION>
December 31, September 30,
1998 1998
----------------- -------------------
<S> <C> <C>
Raw Materials $1,408 $1,078
Work-in-process 2,432 4,270
Finished goods 2,925 2,862
----------------- -------------------
$6,765 $8,210
================= ===================
</TABLE>
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 demand incorrectly and produce excess or insufficient
inventories of particular products. This inventory risk is heightened
because many of the Company's customers place orders with short lead times.
Actual 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 and
forecast 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.
Note 3. Earnings Per Share
The following table sets forth the computation of basic and diluted
earnings per share.
<TABLE>
<CAPTION>
Three months ended December 31,
-------------------------------
1998 1997
------- -------
<S> <C> <C>
Numerator - Net Income (loss) ................ ($7,218) ($ 989)
Denominator for basic earnings per share -
Weighted average shares ...................... 7,508 7,383
Effect of dilutive securities - employee stock
options ...................................... -- --
------- -------
Denominator for diluted earnings per share ... 7,508 7,383
======= =======
Basic earnings (loss) per share .............. ($ 0.96) ($ 0.13)
======= =======
Diluted earnings (loss) per share ............ ($ 0.96) ($ 0.13)
======= =======
</TABLE>
Options and warrants outstanding during the three months ended December
31, 1998 and 1997 were excluded from the computation of diluted net loss per
common share because the effect in periods with a net loss would be
antidilutive.
- 6 -
<PAGE>
Note 4. Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income"
The Company adopted Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" (FAS 130) in the first
fiscal quarter of 1999. FAS 130 requires, for all periods presented,
comprehensive income be reported with the same prominence as other
financial statements. As such, the Company has included these amounts
on the face of the income statement.
Comprehensive income includes net income plus other comprehensive
income. Other comprehensive income for QSI is comprised of changes in
foreign currency translation adjustments.
Accumulated other comprehensive income and changes thereto in
1999 consist of (thousands):
Accumulated other comprehensive income (loss)
at September 30, 1998 ($2,582)
Change for the three months ended December 31, 1998:
Foreign currency translation adjustment 290
Accumulated other comprehensive income (loss) at
December 31, 1998 ($2,292)
There is no tax effect on foreign currency translation adjustments.
Note 5. Change in Life of Certain Assets
In its continuing review of wafer fabrication processes and new
product development the Company has determined that beginning in year
2000 the fab equipment acquired in February 1996 will need to be
upgraded with later generation equipment. It is anticipated that there
is an adequate supply of used equipment available at reasonable cost
to accomplish the upgrade. As a result of this plan, the remaining
useful life of this fab equipment was reduced to twelve months at
October 1, 1998, the beginning of fiscal year 1999. Depreciation and
amortization were increased by $1.2 million this quarter as a result
of the change in remaining useful lives.
Note 6. Siemens Credit
Corporation In March 1998 the Company entered into a lease with
Siemens Credit Corporation for the financing of an Etcher for the fab
in Australia. The Company is current with its lease payments, however,
is not in compliance with certain covenants. In January, 1999,
Siemens, citing violation of certain covenants, placed a demand on the
Company for full payment of the indebtedness of the lease. As a result
of the demand for full payment, the Company has classified the
indebtedness as a current liability in its December 31, 1998 balance
sheet. In the event that the Company is required to make full payment
of the lease obligation, the amount could be up to $1.4 million which
would materially adversely affect the Company's liquidity.
Note 7. Income Taxes
The Company has not recognized a tax benefit for its operating
losses incurred during the three months ended December 31, 1998.
Realization of the tax benefit of the loss is dependent upon the
Company generating sufficient future earnings.
- 7 -
<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 included in Item 1
of this Quarterly Report on Form 10-Q, the Management's Discussion and Analysis
of Financial Conditions and Results of Operations contained in the Company's
10-K filed with the Securities and Exchange Commission on December 4, 1998 and
subsequent filings with the Securities and Exchange Commission.
This report contains forward-looking statements within the meaning Section
21E and Rule 3b-6 under 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 on file with the Securities and Exchange Commission
Proposed Merger with Integrated Device Technology, Inc.
On November 1, 1998, the Company signed a definitive agreement to merge
with Integrated Device Technology, Inc. ("IDT"). Under the terms of the
agreement, each issued and outstanding share of the Company's Common Stock will
be exchanged for 0.6875 shares of Common Stock of IDT. The Company will hold a
special shareholders' meeting to approve the merger. If the Company's
shareholders approve the merger, the merger is planned to close during the
second calendar quarter of 1999.
Results of Operations
Net revenues for the quarter ended December 31, 1998 declined 43% from
the corresponding period in the prior fiscal year. This decrease in revenues was
mainly due to the decrease in networking product revenue. This revenue, which
peaked in the first quarter of fiscal 1998, has been declining as the result of
lower average sales prices and a decline in shipping volumes. Lower revenue for
the FCT logic products, attributable to a decline in both shipping volumes and
in lower average sales prices, and lower average selling prices across all
product lines also contributed to the lower revenues. The Company believes that
the announcement of the merger agreement with IDT did not materially adversely
affect the volume of shipments or the average selling prices of the Company's
products. Rather, the Company attributes such declines to reduced demand and to
intense competition.
Revenues from networking products, which accounted for over 40% of net
revenues in the first quarter of fiscal 1998, declined from $8.6 million in the
first quarter of fiscal 1998 to $2.2 million and accounted for only 20% of net
revenues in the first quarter of fiscal 1999. The Company expects the average
selling prices of the Company's products to generally decline over the lives of
its products. Therefore, to maintain or increase revenues, the Company seeks to
introduce new products and increase unit sales of existing products, principally
by reducing prices, but no assurance can be given that these efforts will be
successful. In addition, there can be no assurance that the demand for the
Company's semiconductor products will remain at its current level or grow in
future periods. Furthermore, there can be no assurance that the Company will be
able to increase or maintain its market share in the future.
The gross margin was negative 3.9% of net revenues in the first quarter of
fiscal 1999 compared to 28% of net revenues in the first quarter of fiscal 1998.
The lower margin was principally due to charges of $1.8 million for inventory
write offs, and accelerated depreciation of $1.2 million related to wafer
fabrication equipment in Australia. The Company, in its continuing evaluations
of its fabrication processes and new product development, and has determined
that beginning in fiscal year 2000 it will be necessary to begin upgrading this
equipment. The remaining book value of this equipment will be depreciated in
fiscal year 1999.
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 pressure on pricing. The Company continues to experience
increasing pricing pressure from its competitors. The Company's margins can vary
depending upon the mix of distributor and direct sales in any particular fiscal
period and the Company anticipates that this mix will continue to fluctuate in
future periods. As a result of the above factors, gross margin fluctuations are
difficult to predict, and there can be no assurance that the Company will attain
a positive gross margin or not be subject to continued declines in gross margins
in future periods.
Research and development expenses were $3.4 million or 32% of net revenues
in the first quarter of fiscal 1999 as compared to $2.7 million or 15% of net
revenues in the first quarter of fiscal 1998. This increase was mainly the
result of costs associated with the development of new networking products.
These cost increases primarily included outside design services of $489,000 and
depreciation of $81,000. The Company believes that the continued development of
its process technology new products is essential to its ability to maintain
revenues and market share and to attain profitability.
Sales and marketing expenses were $1.9 million or 17% of net revenues in
the first quarter of 1999, as compared to $2.4 million or 13% of net revenues in
the first quarter of fiscal 1998. This decrease in selling expenses was
primarily attributable to decreased sales commissions of $340,000 resulting from
lower net revenues and a decrease in payroll expenses of $89,000. The Company
believes that expenditures for sales and marketing activities, particularly in
export markets, are essential to maintaining its competitive position. The
Company expects that selling and marketing expenses may vary as a percentage of
net revenues in future periods.
General and administrative expenses were $1.5 million or 14% of net
revenues in the first quarter of fiscal 1999, as compared to $1.4 million or 7%
of net revenues in the first quarter of fiscal 1998. The increase in the first
quarter of fiscal 1999 was due mainly to expenses of approximately $370,000
incurred in connection with the proposed merger with IDT. Lower expenses of
$79,000 for general legal and bad debts of $70,000 partially offset merger
related expenses.
Interest expense, net of interest income, was $117,000 during the three
months ended December 31, 1998 compared to $153,000 during the first quarter of
fiscal 1998. The decrease was mainly due to lower balances on the Kanematsu
loans for the purchase of property and equipment for QSA and the absence of
interest on the redeemable preference shares issued as part of the consideration
for the purchase of QSA which were redeemed in fiscal 1998.
The Company has not recognized a tax benefit for its operating losses
incurred during the three months ended December 31, 1998. Recognition of the tax
benefit of the loss is dependent upon the Company generating sufficient future
earnings.
Liquidity and Capital Resources
During the three months ended December
31, 1998, the Company used $605,000 of net cash in operating activities compared
to $3.1 million provided by operating activities during the first three months
of fiscal 1998. The increase in cash used in operating activities was mainly due
to the net loss of $7.2 million for the first quarter of fiscal 1999 which was
offset by depreciation and amortization of $3.8 million and changes in operating
assets and liabilities which provided $2.8 million in cash for the first three
months of fiscal 1999. Cash provided by investing activities during the first
three months of fiscal 1999 totaled $1.6 million as a result of the sale of
short-term investments, compared to cash used in investing activities of
$179,000 in the first three months of fiscal 1998. Cash used in financing
activities for both the first three months of 1999 and 1998 was primarily for
the payment of debt.
The Company's principal source of funds for operations and capital
expenditures includes cash balances and cash flow from operations. Should the
proposed merger with IDT fail to be completed, these sources of funds may be
inadequate and the Company may be required to reduce operations and/or raise
additional capital. Additional capital may not be available to the Company at
favorable terms. Additionally, any restructuring of the Company's operations
could result in charges, including charges to recognize impairment of the
Company's assets, that could be material to the Company's financial position and
results of operations.
In March 1998 the Company entered into a lease with Siemens Credit
Corporation for the financing of an Etcher for the fab in Australia. The Company
is current with its lease payments, however, is not in compliance with certain
covenants. In January, 1999, Siemens, citing violation of certain covenants,
placed a demand on the Company for full payment of the indebtedness of the
lease. As a result of the demand for full payment, the Company has classified
the indebtedness as a current liability in its December 31, 1998 balance sheet.
In the event that the Company is required to make full payment of the lease
obligation, the amount could be up to $1.4 million which would materially
adversely affect the Company's liquidity.
Factors That May Affect Future Results
Cautionary Statement Concerning Forward Looking Statements
This report contains certain forward-looking statements that are subject to
risks and uncertainties. For such statements the Company claims the protection
of the safe harbor for forward-looking statements contained in Section 21E of
and Rule 3b-6 under the Securities Exchange Act of 1934. Such forward-looking
statements include, without limitations, statements regarding the Company's
expectations, intentions or future strategies and involve known and unknown
risks, uncertainties and other factors. The following factors, in addition to
those discussed elsewhere in the report, could cause the results to differ
materially from those expressed in such forward looking statements. All forward
looking statements included in this document are based on information available
to the Company on the date hereof, and the Company assumes no obligations to
update any such forward looking statements. Actual results could differ
materially from those projected in the forward-looking statements as a result of
the risk factors set forth below. In evaluating the Company's business,
prospective investors should carefully consider the following risk factors in
addition to the other information set forth herein or incorporated herein by
reference.
Our quarterly and annual operating results are difficult to predict because
they can fluctuate dramatically for a variety of reasons, many of which we
cannot control.
Our quarterly and annual operating results can fluctuate dramatically. For
example, in fiscal 1997, we had net earnings per share of $0.03 per share, while
in fiscal 1996, we lost $0.24 per share and in fiscal 1998, we lost $2.06 per
share. This net loss of $2.06 per share in 1998 exceeded our cumulative net
income for fiscal years 1994, 1995 and 1997 by $0.35 per share and the fiscal
combined losses for the years 1994 through 1998 exceed the cumulative income for
such years by $0.59 per share. Many of the factors affecting our results are
beyond our control. Some of these factors include:
o market demand for our new and existing products;
o the ability of our competitors to offer better products or to offer
similar products at lower prices; and
o the cyclicality of the semiconductor industry in general.
In addition, the factors affecting our quarterly and annual results over
which we have some control include:
o our ability to accurately forecast demand for our existing products;
o our ability to introduce successful new products on a timely basis;
o our ability to control our expenses; and
o our ability to effectively manage our semiconductor fabrication facilit
in Australia.
Each of the above factors is described in more detail below.
Our revenues are unpredictable and subject to rapid decline because they
depend significantly on two existing product lines.
Logic and logic related products and networking products account for
substantially all of our revenue.
Logic and Logic Related Products. Logic and logic related products
accounted for approximately 64%, 69% and 93% of our revenues for the fiscal
years 1998, 1997 and 1996. Demand for our logic products depends heavily on the
market for personal computers. As a result, any adverse change in the demand for
personal computers will adversely affect our ability to sell our logic products.
In addition, the market for logic products is highly competitive. As a result,
if our competitors offer similar products at lower prices we may be forced to
reduce our sales prices to maintain market share or to clear inventory. This
would adversely affect our gross margin and, consequently, our operating and
financial results. Finally, if the designers of microprocessors incorporate the
logic functions that our products perform into their microprocessors, the demand
for our logic products could diminish significantly, which would adversely
affect our revenues, margins, operating results and financial condition.
Networking Products. In early winter 1997 we introduced our 10 Base T and
100 Base Tx products. These networking products accounted for 31% of our revenue
in fiscal year 1998 and 26% in fiscal year 1997. These products are CMOS
transceiver chips that are used in adapters, repeaters, switches and bus cards
in Fast Ethernet networks. They are also used for multiplexers and
demultiplexers and switches in Asynchronous Transmission Mode networks. During
the remainder of fiscal 1997 and fiscal 1998, we derived significant revenue
from the sale of these networking chips, although quarterly revenues from these
products declined continually from the first quarter to the fourth quarter of
fiscal year 1998. In late fiscal 1998, our competitors introduced similar chips
with either better performance or lower prices. As a result of declines in
demand and increased competition, sales for these chips have not met our
forecasts and we have had to reduce our sales prices and, in some cases, reduce
our inventory valuation to reflect the reduced sales prices. We have taken
reserves to account for expected future declines in sales prices, but there can
be no assurance that our reserves are adequate. Any further declines in sales
prices will adversely affect our revenues, gross margins, operating results and
financial condition. Although we are developing new products for this market,
which we believe we will be able to sell at higher prices and margins, there can
be no assurance that we will successfully develop such products in time, that
the demand for these products will meet expectations, that our customers will
like these new products or that we will not face similar price competition for
these products as well.
We must successfully develop and introduce new products to stay
competitive.
For QSI to be successful, we must continually introduce new products at
better price/performance levels than are currently available. Such development
and introduction involves a significant use of cash and if we are unable to
generate sufficient cash to invest in developing and introducing new products,
or to introduce new products that are successful, our results of operations and
financial condition will be adversely affected. New product development and
introduction requires us to invest significantly in:
o research and development;
o prototype testing;
o the production of high precision quartz plates, known as
"photomasks,"which are used to transfer circuit patterns onto
semiconductor wafers;
o and initial inventory build.
In addition, we have to invest in obtaining "design wins." However, it can
be more than a year before a design win results in significant revenues. For
these reasons, we have an ongoing need for liquid assets to fund new product
development and introduction. This requires cash, which we must generate from
operations, divert from other uses or obtain from external financing. In
addition, even if we successfully develop and introduce new products, there can
be no assurance that the products will be successful. Our new products must be
timely, must perform to specifications and must offer a better price/performance
level than existing products.
Business of QSI could suffer due to announcement of the merger.
The announcement of the merger may increase the likelihood of a number of
changes to QSI's business, any of which could have a material adverse effect.
Such changes include but are not limited to:
o loss of key management, development or other personnel of QSI;
o deterioration of QSI's distributor relationships;
o returns of QSI's products;
o decreases or cessation of orders for QSI's products;
o cancellation of agreements by distributors of the QSI product line; and
o delays in product development.
Even if the merger is not completed, QSI could be harmed by the expectation
of these changes and restoring QSI's business to its pre-announcement value
could take a long time and be costly. As a result of the factors described
above, the failure to consummate the merger could have a material adverse effect
on QSI's business, operating results, financial condition and stock trading
price.
The semiconductor industry is characterized by price erosion, declining
gross margins, product obsolescence and heightened international competition in
many markets.
As a result, we must continually develop new products with higher average
selling prices and manage our costs in order to compete. We cannot assure you
that we will be able to do this successfully, and any failure on our part to
reduce costs or introduce new products in response to competitive pressures will
have a material adverse effect on our business. Our competitors include large
semiconductor companies like IDT, Texas Instruments Incorporated, National
Semiconductor Corporation, Level One and Cypress Semiconductor Corporation.
These larger companies have greater financial, technical, marketing and
distribution and other resources and offer broader product lines than we do. In
addition, they have longer standing relationships with their customers and
suppliers. Therefore, these companies may be better able to withstand a downturn
in the market for QSI's products or sustained price reductions in the markets in
which we compete.
Operating the Australia semiconductor fabrication facility is capital
intensive and complex.
We rely on the Australian fabrication facility for most of the wafer
requirements of our logic product family. Although the facility is currently
fully operational, any disruption in production or failure to maintain
acceptable yields would adversely affect us because
o we could be unable to meet the demand for our products; o we would need
to seek another source for our wafers, which would probably raise our
cost per wafer; and
o we would continue to incur the fixed expenses associated with
maintaining the facility even though it wasn't producing wafers for us.
To date, we have invested more than $14.0 million in equipment and other capital
improvements since we purchased the facility in February 1996.
The manufacture of semiconductor wafers is complex and yields are highly
dependent on maintaining a clean environment. Although the fabrication process
is highly controlled, the equipment may not perform flawlessly. A substantial
percentage of wafers could be rejected or individual dies on a wafer could be
nonfunctional due to minor impurities, difficulties in the production process or
defects in the masks. In addition, we rely on external sources for the raw
materials used in the wafer fabrication process. Although we have tried to
qualify multiple vendors, any shortage of raw materials or increase in the cost
of raw materials would adversely impact our ability to produce enough wafers to
meet our demands and would raise our cost per wafer.
We store, use and dispose of hazardous materials in our fabrication process
and we could incur substantial fines or remediation costs associated
with any violation of the laws or regulations or any environmental
damage attributed to our use, storage or disposal of these materials.
In addition, the storage, use and disposal of these chemicals and gases are
subject to laws and regulations at the national, state and local level. Because
the public is focusing more on environmental issues and the safety hazards
associated with handling hazardous and toxic material, the laws and regulations
governing them may become more stringent. As a result, we may have to incur
additional expenses in the future in order to comply with more stringent rules
or regulations governing the handling of the chemicals and gases used in our
Australian fabrication facility.
We have limited control over the fabrication, assembly and testing of our
products because we depend on third parties for these functions.
Fabrication. Although we fabricate a majority of our wafers in our
Australia facility, we still rely on Taiwan Semiconductor Manufacturing Company,
Ltd., for a substantial number of wafers for small geometry networking products.
Under the terms of our agreements with TSMC, they can terminate the relationship
at any time, and we would need to find an alternative source for these wafers,
which could be a time-consuming and expensive process, and could cause us to
miss order deadlines, experience reduced revenues and incur higher costs of
goods sold. In addition, there are other risks involved in relying on TSMC as a
supplier of wafers which include:
o we have less control over delivery schedules;
o we can't be assured that TSMC will always have the capacity available to
meet our needs;
o we have less control over quality assurance processes;
o TSMC may experience technical and/or production problems that would
prevent them from being able to fill our orders; and
o there is an increased risk that our intellectual property may be
misappropriated.
In addition, the dependence on a third party wafer supplier tends to slow
the product development cycle because of the need to coordinate design activity
and qualify processes. Because we have little control over whether TSMC
continues to improve its processes, such as fabrication in finer geometries, our
competitors who do not rely on third party wafer fabrication may be better able
to transition to improved processes and, as a consequence, offer products at a
better price/performance level than our products.
Assembly and Testing. Substantially all of our assembly is performed by
Digital Testing Services. In addition, we rely on SPIC Electronics Laboratory in
India. We also rely on SPIC and Digital Testing to perform substantially all of
our testing for our networking products. Consequently, we have less control over
the quality and availability of the services that they provide. If the quality
or reliability of these vendors degrades, or if we have to find alternate
sources of assembly and testing, the process of qualifying alternate vendors
could delay product development and product shipment and could result in loss of
customers, limitations or reductions in our revenues and other adverse effects
on our operating results.
Our operating results are subject to significant fluctuations because
we depend on foreign suppliers and foreign buyers.
We purchase a significant amount of our wafers and substantially all of our
assembly services from foreign suppliers, primarily in Taiwan and India and we
sell a significant amount of our products to foreign buyers. Export sales to
Asia constituted 26% of our net revenues in fiscal 1998 and 34% of our net
revenues in fiscal 1997, while export sales to Europe accounted for 9% of our
net revenue in fiscal 1998 and 8% of our net revenue in fiscal 1997. As a
result, we are subject to the risks generally associated with doing business
abroad. These risks include, but are not limited to:
o the need to comply with foreign government regulations;
o currency fluctuation; and
o greater risk of disruptions or delays in shipments due to political
unrest, or economic instability.
For example, our revenues from our Asian customers declined by 49% during
the fourth quarter of fiscal 1998 from the same period in fiscal 1997 as the
result of uncertainties in the Asian capital markets.
In addition, to the extent that we make yen-denominated purchases of wafers
from our Japanese suppliers, we may be exposed to the risk that the exchange
rate of yen for dollars may decrease from the date that the purchases are agreed
upon and the wafers are delivered and, therefore, we would have underestimated
the cost of such wafers.
Our revenues and operating results can be adversely affected by
litigation involving patents and proprietary rights.
The semiconductor industry is characterized by substantial litigation
regarding patent and other intellectual property rights. Intellectual property
litigation can be expensive and can divert the energy of our management and
engineers. In addition, if any of our products are found to infringe a third
party's valid patent, then we might be subject to injunctions and significant
damages. Furthermore, we would have to either design around such patents or
obtain a license. If we are unable to successfully design around the patents or
obtain a license, then we might be unable to offer the product and our revenues
and operating results could be materially adversely affected. In the past we
have received correspondence from Cypress Semiconductor, Inc., the Lemelson
Medical, Education & Research Foundation, International Business Machines
Corporation and MUSIC Semiconductor, Inc., claiming that we may have infringed
certain patents. Our patent counsel is reviewing these claims. Although we
believe that we have valid defenses against such claims, we cannot assure you
that we will not have to litigate such claims or enter into a settlement or
license agreement to dismiss the claims. However, because the patents others are
asserting primarily involve manufacturing processes, revenues from substantially
all of our products could be subject to the alleged infringement claims.
We depend on certain key personnel to manage our operations and develop
new products.
Our success depends on our ability to recruit and retain highly skilled
engineers, marketing personnel and managers. In particular, we have a strong
need for highly skilled design, process and test engineers, for whom competition
is intense. We cannot assure you that we will be successful in hiring or
retaining such key personnel or that any of our key personnel will remain
employed with us.
Our customers are highly concentrated and our revenues could be adversely
affected by the loss of key customers.
Most of our revenue typically comes from a relatively small number of
customers. For example, in fiscal year 1998, our top seven customers accounted
for 53% of our total revenue. If we were to lose any of these customers, our
revenues and operating results would be materially adversely affected. In
addition, we typically have to provide volume pricing discounts to these
customers, which reduces our gross margin.
We have less control over the distribution of our products because we
depend significantly on manufacturing representatives and distributors.
We market and distribute our products primarily through manufacturers'
representatives and independent distributors. If our distributors or
representatives were to reduce the number of our products they carry or to
terminate their relationships with us, we could experience reduced revenues and
would incur additional sales expenses associated with finding a replacement. In
addition, if we don't respond to rapid changes in the channel due to factors
such as consolidation or distributor financial difficulties.
If we are not adequately prepared for the transition to the Year 2000, our
operations will be harmed.
If our company-wide Year 2000 readiness program does not successfully
address the issue of computer programs and embedded computer chips being unable
to distinguish between the Year 1900 and the Year 2000, we may suffer an
interruption in or failure of our normal business activities and operations. In
addition, even if we successfully identify and correct any products or internal
systems that are not Year 2000 compliant, the third parties on whom we rely for
such things as telephones, banking, manufacturing, supplies and shipping may not
have systems that are Year 2000 compliant. Although we cannot determine the full
extent of effects of a Year 2000 failure by us or by our key suppliers and
customers, the most reasonably likely worst case scenario could result in delays
in the production or shipment of products to our customers or delays in our
ability to collect accounts receivable from our customers. In the aggregate,
these delays could adversely affect our results of operations, liquidity or
supplier and customer relations.
Through December 1998, we had spent approximately $230,000 on our Y2K
program. We estimate that we may spend up to an additional $300,000 for other
repairs, replacements or upgrades and for coordinating our Y2K compliance
efforts with key suppliers and customers. However, we cannot assure you that we
will not have to spend significantly more to ensure that our products and
internal systems are Year 2000 compliant or to remedy any situations caused by a
Year 2000 failure. We do not have a contingency plan to address the Year 2000
problem, in the event that our current program is unsuccessful, but we expect to
create one by June 1999.
Our operating results and financial condition are difficult to predict
because the semiconductor industry is cyclical and subject to rapid change.
We may experience substantial period-to-period fluctuations in future
operating results due to general semiconductor industry conditions, overall
economic conditions or other factors. 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 average selling prices and overcapacity. In addition, the
end-markets for systems that incorporate QSI's products are characterized by
rapidly changing technology and evolving industry standards.
Our stock price is volatile.
Our earnings and stock price have been, and may be, subject to significant
volatility, particularly on a quarterly basis due to changes in our operating
results and financial conditions as well as to conditions that generally affect
technology companies. Any shortfall in revenue, gross margins or earnings from
expected levels could have an immediate and significant adverse effect on the
trading price of our stock in any given period. We 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
our revenue in a quarter typically is shipped in the last few weeks of that
quarter. In addition, future announcements concerning us or our competitors,
including technological innovations, new product introductions, governmental
regulations, litigation, or changes in earnings estimates by analysts, may cause
the market price of our 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.
Because of the typically low daily trading volumes of our stock, our stock price
is particularly volatile and you may find it difficult to buy or sell a large
quantity of our stock.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
For financial market risks related to changes in interest rates and
foreign currency exchange rates, reference is made to Part II, Item 7A,
Quantitative and Qualitative Disclosures About Market Risk, in the Registrant's
Annual Report on Form 10-K/A for the year ended September 28, 1998, filed on
March 22, 1999.
- 8 -
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings - Not Applicable
Item 2. Changes in Securities and Use of Proceeds - Not Applicable
Item 3. Defaults Upon Senior Securities - Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders - Not Applicable
Item 5. Other Information - Not applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.20 - Agreement and Plan of Merger by and among Integrated
Device Technology, Inc., Penguin Acquisition, Inc., and
Quality Semiconductor, Inc., dated November 1, 1998*
27.1 - Financial Data Schedule
(b) Reports on Form 8-K
On November 4, 1998, the Company filed a Form 8-K reporting
under Item 5, the agreement to merge with Integrated
Device Technologies, Inc.
* Incorporated by reference to the identically numbered exhibit filed with the
Company's Form 8-K dated November 4, 1998.
- 9 -
<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: March 19, 1999 By: / s / R. Paul Gupta
R. Paul Gupta
Director, President and Chief Executive Officer
Date: March 19,1999 By: / s / Stephen H. Vonderach
Stephen H. Vonderach
Vice President of Finance, Chief Financial
Officer, and Chief Accounting Officer
- 10 -
<PAGE>
Exhibit 27.1
QUALITY SEMICONDUCTOR, INC.
Financial Data Schedule
(In thousands, except per share data)
(Unaudited)
<TABLE>
Fiscal Year End September 30, 1999
Period Beginning October 1, 1998
Period Ending December 31, 1998
<S> <C>
Cash and cash equivalents $6,274
Marketable securities -
Notes and accounts receivable - trade 5,686
Allowances for doubtful accounts (871)
Inventory 6,765
Total current assets 19,028
Property, plant and equipment 44,526
Accumulated depreciation (25,415)
Total assets 38,617
Total current liabilities 15,485
Bonds, mortgages and similar debt -0-
Preferred stock - mandatory redemption -0-
Preferred Stock - non-mandatory redemption -0-
Common Stock 8
Other Stockholders' Equity 41,871
Total liabilities and stockholders' equity 38,617
Net sales of tangible products 10,646
Total revenue 10,646
Cost of tangible goods sold 11,058
Total costs and expenses applicable to sales and revenue 6,689
Other costs and expenses -0-
Provision for doubtful accounts and notes -0-
Interest and amortization of debt discount (117)
Income (loss) before taxes (7,218)
Income tax expense (benefit) -0-
Income/loss continuing operations (7,218)
Discontinued operations -0-
Extraordinary items -0-
Cumulative effect-changes in accounting principles -0-
Net income (loss) (7,218)
Earnings per share - basic (0.96)
Earnings per share - diluted (0.96)
</TABLE>
- 11 -
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
(Replace this text with the legend)
</LEGEND>
<CIK> 0000869886
<NAME> Financial Data Schedule
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-1-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1,000
<CASH> 6,274
<SECURITIES> 0
<RECEIVABLES> 5,686
<ALLOWANCES> (871)
<INVENTORY> 6,765
<CURRENT-ASSETS> 19,028
<PP&E> 44,526
<DEPRECIATION> (25,415)
<TOTAL-ASSETS> 38,617
<CURRENT-LIABILITIES> 15,485
<BONDS> 0
0
0
<COMMON> 8
<OTHER-SE> 41,871
<TOTAL-LIABILITY-AND-EQUITY> 38,617
<SALES> 10,646
<TOTAL-REVENUES> 10,646
<CGS> 11,058
<TOTAL-COSTS> 6,689
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (117)
<INCOME-PRETAX> (7,218)
<INCOME-TAX> 0
<INCOME-CONTINUING> (7,218)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,218)
<EPS-PRIMARY> (0.96)
<EPS-DILUTED> (0.96)
</TABLE>
