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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JANUARY 28, 2001 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________.
0-21488
(Commission File Number)
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CATALYST SEMICONDUCTOR, INC.
(Exact name of Registrant as specified in its charter)
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DELAWARE 77-0083129
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1250 BORREGAS AVENUE
SUNNYVALE, CALIFORNIA 94089
(Address of Registrant's principal executive offices) (Zip Code)
(408) 542-1000
(Registrant's telephone number, including area code)
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 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 shares outstanding of the Registrant's Common Stock as of
March 12, 2001 was 17,260,615
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CATALYST SEMICONDUCTOR, INC.
TABLE OF CONTENTS
PAGE
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements...................................................................... 3
Unaudited Condensed Consolidated Balance Sheets
at January 31, 2001 and April 30, 2000................................................... 3
Unaudited Condensed Consolidated Statements of Income for the three
and nine month periods ended January 31, 2001 and 2000................................... 4
Unaudited Condensed Consolidated Statements of Cash Flows for the nine
month periods ended January 31, 2001 and 2000............................................ 5
Notes to Unaudited Condensed Consolidated Financial Statements............................ 6
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition....................................................... 9
SIGNATURES................................................................................................. 19
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CATALYST SEMICONDUCTOR, INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
JANUARY 31, APRIL 30,
2001 2000
--------------- -------------
ASSETS
Current assets:
Cash........................................................................ $ 32,628 $ 6,205
Accounts receivable, net.................................................... 14,268 10,727
Inventories................................................................. 7,907 3,531
Other assets................................................................ 278 624
--------------- -------------
Total current assets.................................................... 55,081 21,087
Property and equipment, net.................................................... 2,351 1,856
--------------- -------------
Total assets............................................................ $ 57,432 $ 22,943
=============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit.............................................................. $ 2,025 $ 2,028
Accounts payable............................................................ 8,507 5,721
Accounts payable--related parties............................................ 1,118 1,024
Accrued expenses............................................................ 6,055 2,522
Deferred gross profit on shipments to distributors.......................... 2,784 880
Current portion of long-term debt and capital lease obligations............. 117 203
--------------- -------------
Total current liabilities............................................... 20,606 12,378
Long-term debt and capital lease obligations................................... -- 64
--------------- -------------
Total liabilities....................................................... 20,606 12,442
Total stockholders' equity..................................................... 36,826 10,501
--------------- -------------
Total liabilities and stockholders' equity.............................. $ 57,432 $ 22,943
=============== =============
See accompanying notes to the unaudited condensed
consolidated financial statements.
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CATALYST SEMICONDUCTOR, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED NINE MONTHS ENDED
---------------------------- --------------------------
JANUARY 31, JANUARY 31, JANUARY 31, JANUARY 31,
2001 2000 2001 2000
-------------- ------------ ------------ -------------
Net revenues........................................... $ 23,579 $ 12,536 $ 80,854 $ 32,432
Cost of revenues....................................... 12,543 7,212 40,122 18,140
-------------- ------------ ------------ -------------
Gross profit........................................... 11,036 5,324 40,732 14,292
Research and development............................... 1,182 646 3,323 1,951
Selling, general and administrative.................... 2,766 2,209 9,796 6,776
-------------- ------------ ------------ -------------
Income from operations................................. 7,088 2,469 27,613 5,565
Interest income (expense), net......................... 293 (127) 484 (416)
-------------- ------------ ------------ -------------
Income before income taxes............................. 7,381 2,342 28,097 5,149
Income tax provision................................... 370 -- 2,470 --
-------------- ------------ ------------ -------------
Net income............................................. $ 7,011 $ 2,342 $ 25,627 $ 5,149
============== ============ ============ =============
Net income per share:
Basic............................................... $ 0.41 $ 0.16 $ 1.55 $ 0.36
============== ============ ============ =============
Diluted............................................. $ 0.35 $ 0.12 $ 1.25 $ 0.27
============== ============ ============ =============
Weighted average common shares:
Basic............................................... 16,950 14,492 16,546 14,164
============== ============ ============ =============
Diluted............................................. 20,204 19,976 20,517 18,986
============== ============ ============ =============
See accompanying notes to the unaudited condensed
consolidated financial statements.
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CATALYST SEMICONDUCTOR, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
NINE MONTHS ENDED
----------------------------
JANUARY 31, JANUARY 31,
2001 2000
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income..................................................................... $ 25,627 $ 5,149
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization.......................................... 765 728
Changes in working capital:
Accounts receivable.................................................... (3,541) (2,597)
Inventories............................................................ (4,376) (100)
Other assets........................................................... 346 88
Accounts payable (including related parties)........................... 2,880 (2,065)
Accrued expenses....................................................... 3,824 687
Deferred gross profit on shipments to distributors..................... 1,904 (136)
------------- -------------
Net cash provided by operating activities......................................... 27,429 1,754
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash used for the acquisition of equipment..................................... (1,260) (608)
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Cash used in investing activities.......................................... (1,260) (608)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Exercise of stock options...................................................... 407 810
Net payments on line of credit................................................. (3) 497
Payment of long-term debt and capital lease obligations........................ (150) (900)
------------- -------------
Cash provided by (used in) financing activities............................ 254 407
------------- -------------
Net increase (decrease) in cash and cash equivalents.............................. 26,423 1,553
Cash at beginning of the period................................................... 6,205 1,852
------------- -------------
Cash at end of the period......................................................... $ 32,628 $ 3,405
============= =============
SUPPLEMENTAL NON-CASH INFORMATION:
Accrued compensation credited to equity upon exercise of options............... $ 291 $ 28
See accompanying notes to the unaudited condensed
consolidated financial statements.
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CATALYST SEMICONDUCTOR, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
In the opinion of management, the unaudited condensed consolidated interim
financial statements included herein have been prepared on the same basis as the
April 30, 2000 audited consolidated financial statements and include all
adjustments, consisting of only normal recurring adjustments, necessary to
fairly state the information set forth herein. The statements have been prepared
in accordance with the regulations of the Securities and Exchange Commission,
but omit certain information and footnote disclosures necessary to present the
statements in accordance with accounting principles generally accepted in the
United States. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's Annual Report on Form
10-K/A for the year ended April 30, 2000. The results of operations for the nine
month period ended January 31, 2001 are not necessarily indicative of the
results to be expected for the entire year.
The Company's business is highly cyclical and has been subject to
significant downturns at various times which have been characterized by reduced
product demand, production overcapacity and significant erosion of average
selling prices. Throughout fiscal 1998 and 1999, the market for certain FLASH
and EEPROM devices, which comprise the majority of Catalyst's business,
experienced an excess market supply relative to demand which resulted in a
significant downward trend in prices. During fiscal 2000, the semiconductor
market rebounded from a cyclical decline which had a favorable impact on the
Company's revenues and gross margins into fiscal 2001 through the quarter ended
October 2000. During the fiscal quarter ended January 31, 2001, however, the
market for the Company's products became more competitive as a result of the
increased availability of products when demand was decreasing. The Company could
experience other such downward trends in product pricing in the future which
could further adversely affect the Company's operating results.
The Company's fiscal year and its first, second and third fiscal quarters
end on the Sunday closest to April 30, July 31, October 31 and January 31,
respectively. For purposes of financial statement presentation, the year end
date is expressed as April 30 and the quarter end dates are expressed as July
31, October 31 or January 31.
Comprehensive income is defined as the change in equity of a business
enterprise during a period from transactions and other events and circumstances
from non-owner sources. Through January 31, 2001, the Company has not had any
transactions that are required to be reported in other comprehensive income.
NOTE 2. INCOME PER SHARE
Basic net income per share is computed by dividing net income available to
common shareholders (numerator) by the weighted average number of common shares
outstanding (denominator) during the period and excludes the dilutive effect of
stock options. Diluted net income per share gives effect to all dilutive
potential common shares outstanding during a period. In computing diluted net
income per share, the average stock price for the period is used in determining
the number of shares assumed to be purchased from exercise of stock options.
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A reconciliation of the numerators and denominators of the basic and
diluted income per share is presented below:
THREE MONTHS ENDED NINE MONTHS ENDED
--------------------------- ---------------------------
JANUARY 31, JANUARY 31, JANUARY 31, JANUARY 31,
2001 2000 2001 2000
------------- ------------ ------------- ------------
Net income............................................ $ 7,011 $ 2,342 $ 25,627 $ 5,149
============= ============ ============= ============
Shares calculation:
Weighted average shares outstanding--basic.......... 16,950 14,492 16,546 14,164
Effect of dilutive securities:
Stock options...................................... 3,254 5,484 3,971 4,822
------------- ------------ ------------- ------------
Weighted average shares outstanding--diluted........... 20,204 19,976 20,517 18,986
============= ============ ============= ============
Net income (loss) per share:
Basic.............................................. $ 0.41 $ 0.16 $ 1.55 $ 0.36
============= ============ ============= ============
Diluted............................................ $ 0.35 $ 0.12 $ 1.25 $ 0.27
============= ============ ============= ============
Options to purchase 1,216,999 shares of common stock at prices from $6.06
to $9.50 per share outstanding during the quarter ended January 31, 2001 and
options to purchase 70,000 shares of common stock at prices from $5.00 to $6.30
per share outstanding during the quarter ended January 31, 2000 were not
included in the computation of diluted EPS because the inclusion of such options
would have been antidilutive.
Options to purchase 152,500 shares of common stock at prices from $7.88 to
$9.50 per share outstanding during the nine month period ended January 31, 2001
and options to purchase 732,000 shares of common stock at prices from $5.00 to
$6.30 per share outstanding during the nine month period ended January 31, 2000
were not included in the computation of diluted EPS because the inclusion of
such options would have been antidilutive.
NOTE 3. BALANCE SHEET COMPONENTS (IN THOUSANDS):
JANUARY 31, APRIL 30,
2001 2000
--------------- ------------
Accounts receivable:
Accounts receivable........................................................... $ 14,768 $ 11,013
Less: Allowance for doubtful accounts......................................... (500) (286)
--------------- ------------
$ 14,268 $ 10,727
=============== ============
Inventories:
Work-in-process............................................................... $ 5,427 $ 2,516
Finished goods................................................................ 2,480 1,015
--------------- ------------
$ 7,907 $ 3,531
=============== ============
Property and equipment:
Engineering and test equipment................................................ $ 9,204 $ 8,012
Computer hardware and software................................................ 3,564 3,517
Furniture and office equipment................................................ 1,307 1,286
--------------- ------------
14,075 12,815
Less: accumulated depreciation and amortization............................... (11,724) (10,959)
--------------- ------------
$ 2,351 $ 1,856
=============== ============
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NOTE 4. DEBT
Under the terms of a bank revolving line of credit, the Company can borrow
the lesser of $5.0 million or an amount determined by a formula applied to
eligible accounts receivable at a variable interest rate of prime (9.5% at
January 31, 2001) plus 2.5%. Amounts borrowed on the line of credit are secured
by accounts receivable and are subject to compliance with loan covenants. The
Company was in compliance with these covenants at January 31, 2001. As of
January 31, 2001, $2.0 million was outstanding under the line.
NOTE 5. 1998 SPECIAL EQUITY INCENTIVE PLAN
In December 1998, the Company adopted an additional stock option plan
entitled the Special Equity Incentive Plan ("Special Option Plan") for incentive
stock options and non-statutory stock options for certain directors, officers
and consultants of the Company. A total of 3.5 million shares of Common Stock
have been reserved for issuance under the Special Option Plan. Options granted
under the Special Option Plan are for periods not to exceed ten years. Options
generally vest over four year periods. During fiscal 1999, options totaling 3.0
million shares were granted under the plan at a price of $0.125 per share when
the market was at $0.26 per share. As a result, an aggregate of $517,000 of
compensation expense will be recognized over the four year vesting period of the
options, $28,000 of which was recognized during the three month period ended
January 31, 2001. An aggregate of $280,000 of such expense has been recognized
through January 31, 2001 and $237,000 remains to be recognized in future
periods.
NOTE 6. RELATED PARTY TRANSACTIONS
During the fourth quarter of fiscal 2000, the Company began taking delivery
of wafers fabricated at X-fab Texas, Inc. (Xfab), a wholly owned subsidiary of
Elex NV, a Belgian holding company that owns 31.9% of the outstanding shares of
the Company. The wafers provided by Xfab supplement the same designs fabricated
at Oki Semiconductor in Japan, the Company's principal wafer fab since 1985. The
Company believes that the cost of such wafers is no greater than comparable
materials available from alternative foundry services. During the nine months
ended January 31, 2001, the Company's purchases from Xfab totaled $6,243,000. As
of January 31, 2001, the total amount owed Xfab was $871,000. Mr. Duchatelet is
the Chairman and CEO of Elex NV and serves as a member of the Company's Board of
Directors.
The Company has had an arrangement since 1995 to obtain engineering
services from Lxi Corporation, a California corporation (Lxi), a provider of
engineering services through Essex com SRL (Essex), its wholly owned subsidiary
in Romania. As of January 31, 2001, Essex employed the equivalent of
approximately 12 engineers to perform the services on behalf of Catalyst. The
services relate to key development projects of the Company including
development, design, layout and test program development services. Officers of
the Company, Messrs. Vanco, Voicu and Gay own approximately 91%, 3% and 1%,
respectively, of Lxi. The fees for such engineering services are on terms
believed by the Company to be fair to the Company and no less favorable to the
Company than arms length commercial terms. During the nine months ended January
31, 2001 the Company recorded $530,000 of engineering fees from Lxi for
engineering design services. As of January 31, 2001 the total amount owed to Lxi
was $247,000.
NOTE 7. COMMITMENTS
In July 2000, the Company entered into an arrangement with Oki to increase
the supply of wafers for the period beginning September 1, 2000 through August
30, 2001. In return for this increase in capacity from Oki, the Company has
agreed to make two payments of $5.0 million, one of which was paid in September
2000 and one of which is due in March 2001.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
The following discussion should be read in conjunction with the
accompanying condensed consolidated financial statements and notes thereto
included in this report. In addition, the Company desires to take advantage of
the "safe harbor" provisions of the Private Securities Litigation Reform Act of
1995. Specifically, the Company wishes to alert readers that the factors set
forth in "Certain Factors that May Affect the Company's Future Results" as set
forth below in this Item 2, as well as other factors, in the past have affected
and in the future could affect the Company's actual results, and could cause the
Company's results for future quarters to differ materially from those expressed
in any forward looking statements made by or on behalf of the Company.
OVERVIEW
Catalyst Semiconductor, Inc., incorporated October 8, 1985, designs,
develops and markets nonvolatile memory semiconductor products including Serial
and Parallel EEPROMs and Flash memory. Revenues are derived from sales of
semiconductor products designed by the Company and manufactured by other
companies.
The Company's business is highly cyclical and has been subject to
significant downturns at various times which have been characterized by reduced
product demand, production overcapacity and significant erosion of average
selling prices. Throughout fiscal 1998 and 1999, the market for certain FLASH
and EEPROM devices, which comprise the majority of Catalyst's business,
experienced an excess market supply relative to demand which resulted in a
significant downward trend in prices. During fiscal 2000, the semiconductor
market rebounded from a cyclical decline which had a favorable impact on the
Company's revenues and gross margins into fiscal 2001 through the quarter ended
October 2000. During the fiscal quarter ended January 2001, however, the market
for the Company's products became more competitive as a result of the increased
availability of products when demand was decreasing. The Company could
experience other such downward trends in product pricing in the future which
could further adversely affect the Company's operating results.
RESULTS OF OPERATIONS
Revenues. Total revenues consist primarily of net product sales. A
substantial portion of net product sales has been made through independent
distributors. Revenue from product sales to original equipment manufacturers and
from sales to distributors who have no, or limited, product return rights and no
price protection rights, is recognized upon shipment net of allowances for
estimated returns. When distributors have rights to return products or price
protection rights, the Company defers revenue recognition until the distributor
sells the product to the end customer. Total revenues increased 89% to $23.6
million for the quarter ended January 31, 2001 from $12.5 million for the
quarter ended January 31, 2000. The increase is primarily attributable to an
increase in units shipped and price of the Company's EEPROM products. Total
revenues of $23.6 million for the quarter ended January 31, 2001 decreased by
26% from $31.8 million for the quarter ended October 31, 2000. The decrease is
primarily attributable to a decrease in units shipped and lower selling prices.
For the nine months ended January 31, 2001, total revenues increased 150% to
$80.9 million from $32.4 million for the nine months ended January 31, 2000. The
increase is primarily attributable to increased shipments into certain markets
in the Far East and Japan. For the nine months ended January 31, 2001,
approximately 63% of the Company's net product shipments were to international
customers compared with 60% of net product shipments during fiscal 2000. All
sales of the Company's products are in US dollars, minimizing the effects of
currency fluctuations.
Gross Profit. Gross profit for the quarter ended January 31, 2001 was $11.0
million, or 47% of revenues, compared to a gross profit of $5.3 million, or 42%
of revenues, for the quarter ended January 31, 2000. The increase in gross
profit percentage is primarily due to increased prices in the market for the
Company's products and decreased unit assembly and testing costs. Gross profits
of $11.0 million for the quarter ended January 31, 2001 decreased by 34% from
$16.6 million for the quarter ended October 31, 2000. The decrease is primarily
attributable to deteriorating market conditions for the Company's products.
Gross profit for the nine months ended January 31, 2001 was $40.7 million, or
50% of revenues, compared to a gross profit of $14.3 million, or 44% of
revenues, for the nine months ended January 31, 2000. The increase in gross
profit percentage is primarily due to increased prices in the market for its
products and decreased unit assembly and testing costs. During the nine months
ended January 31, 2001, the Company has also received the benefit of
approximately $2.0 million of credits from the sale of inventory which was
previously reserved. The benefit of such credits is offset by the $3.1 million
of additional inventory reserves that were added during the same nine month
period. In addition, in the quarter ended October 31, 1999, the Company received
the benefit of a $0.8 million credit from the settlement of claims for amounts
due to a vendor
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which reduced cost of sales for that quarter. Further, in the quarter ended July
31, 1999, the Company received the benefit of approximately $0.5 million credit
from the sale of inventory which was previously reserved. It is the policy of
the Company to fully reserve all inventory that is not expected to be sold
within a reasonable period of time following the balance sheet date, generally
within the ensuing six months. The Company pays certain foreign manufacturing
expenses in local currency, primarily Baht in Thailand and Yen in Japan. Such
expenses are not material to the Company and the majority are paid within 45
days, minimizing the effects of currency fluctuations.
Research and Development. Research and development (R&D) expenses consist
principally of salaries for engineering, technical and support personnel,
depreciation of equipment, and the cost of wafers used to evaluate new products
and new versions of current products. R&D expenses increased by 100% to $1.2
million, or 5% of revenues, for the quarter ended January 31, 2001, from $0.6
million, or 5% of revenues for the quarter ended January 31, 2000. The increase
in R&D spending is primarily attributable to increased expenses for personnel.
For the nine months ended January 31, 2001, R&D expenses increased 65% to $3.3
million or 4% of revenues from $2.0 million or 6% of revenues for the nine
months ended January 31, 2000. The increase is primarily attributable to
increased expenses for personnel.
Selling, General and Administrative. Selling, general and administrative
(SG&A) expenses consist principally of salaries for sales, marketing and
administrative personnel, commissions and promotional activities. SG&A expenses
increased by 27% to $2.8 million, or 12% of revenues, for the quarter ended
January 31, 2001, from $2.2 million, or 18% of revenues, for the quarter ended
January 31, 2000. The increase is primarily attributable to increased expenses
for sales and administrative personnel and increased commission expenses to
outside representatives. For the nine months ended January 31, 2001, SG&A
expenses increased 44% to $9.8 million or 12% of revenues from $6.8 million or
21% of revenues for the nine months ended January 31, 2000. The increase is
primarily attributable to increased expenses for sales and administrative
personnel and increased commission expenses to outside representatives.
Net Interest Income/Expense. Net interest income was $293,000 for the
quarter ended January 31, 2001, compared to net interest expense of $127,000 for
the quarter ended January 31, 2000. The increase is primarily related to the
interest earned on the Company's increased cash and decreased average
outstanding borrowings. Net interest income was $484,000 for the nine months
ended January 31, 2001, compared to net interest expense of $416,000 for the
nine months ended January 31, 2000. The increase is primarily related to the
interest earned on the Company's increased cash and decreased average
outstanding borrowings.
Income Tax Provision. The Company recorded a provision for income taxes of
$0.4 million or 5% of net income before taxes for the quarter ended January 31,
2001, compared to a provision of zero for the quarter ended January 31, 2000.
The Company has recorded a provision for income taxes of $2.5 million or 9% of
net income before taxes for the nine months ended January 31, 2001, compared to
a provision of zero for the nine months ended January 31, 2000. The provision
for income tax primarily represents the estimated proportional share of income
tax liability for the fiscal year after deductions for available net operating
loss carryforwards and income tax credits.
As of April 30, 2000, the Company had available net operating loss
carryforwards of approximately $22.8 million for federal tax purposes, which
begin to expire in fiscal 2004. The net income before taxes of the Company for
fiscal 2001 is expected to be sufficient to fully utilize such carryforwards
this fiscal year. If the available net operating loss carryforwards are fully
utilized in fiscal 2001 as expected, the Company will likely experience an
increased rate of income taxation in future fiscal years. Furthermore, the
availability of the net operating loss and general business credit carryforwards
may potentially be reduced in the event of substantial changes in equity
ownership.
LIQUIDITY AND CAPITAL RESOURCES
Net cash generated by operations was $27.4 million for the nine months
ended January 31, 2001, which was due primarily to net income of $25.6 million,
an increase in accounts payable and other liabilities of $8.6 million related to
the increased sales and manufacturing activity and depreciation and amortization
of $0.8 million. This was partially offset by an increase in net accounts
receivable of $3.5 million and an increase in inventories of $4.4 million which
were also related to the increase in sales and manufacturing activity,
respectively. Net cash generated by operating activities for the nine months
ended January 31, 2000 was $1.8 million.
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The Company's investing activities used $1.3 million during the nine months
ended January 31, 2001 related primarily to the acquisition of equipment for
manufacturing activities. Cash used in investing activities for the nine months
ended January 31, 2000 was $0.6 million.
Financing activities generated $0.3 million during the nine months ended
January 31, 2001, consisting primarily of the proceeds from the exercise of
stock options. This was partially offset by principal payments on our capital
leases. During the nine months ended January 31, 2000, the cash provided by
financing activities was $0.4 million.
Under the terms of a bank revolving line of credit, the Company can borrow
the lesser of $5.0 million or an amount determined by a formula applied to
eligible accounts receivable at a variable interest rate of prime (9.5% at
January 31, 2001) plus 2.5%. As of January 31, 2001, the Company had
approximately $2.0 million of secured loans owed to its bank. As of January 31,
2001, under the terms of its borrowing agreement, the Company was eligible to
borrow approximately $3.0 million additional cash and had cash on hand of $32.6
million. The Company is also indebted to other creditors in the amount of
approximately $9.6 million. This amount is comprised of approximately $9.2
million for wafers and inventory processing and approximately $0.4 million for
other goods and services.
Although management believes the Company has sufficient working capital
resources to continue its operations for at least the next twelve months,
management may decide to seek additional equity or debt financing to address its
working capital needs and to provide funding for capital expenditures. There can
be no assurances, however, that financing will be available on terms acceptable
to the Company, if at all.
CERTAIN FACTORS THAT MAY AFFECT THE COMPANY'S FUTURE RESULTS
THE COMPANY DESIRES TO TAKE ADVANTAGE OF CERTAIN PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995, ENACTED IN DECEMBER 1995 (THE "REFORM
ACT") THAT PROVIDES A "SAFE HARBOR" FOR FORWARD-LOOKING STATEMENTS MADE BY OR ON
BEHALF OF THE COMPANY. THE COMPANY HEREBY CAUTIONS STOCKHOLDERS, PROSPECTIVE
INVESTORS IN THE COMPANY AND OTHER READERS THAT THE FOLLOWING IMPORTANT FACTORS,
AMONG OTHERS, IN SOME CASES HAVE AFFECTED, AND IN THE FUTURE COULD AFFECT, THE
COMPANY'S STOCK PRICE OR CAUSE THE COMPANY'S ACTUAL RESULTS FOR THE FISCAL YEAR
AND QUARTER ENDING APRIL 30, 2001 AND FUTURE FISCAL YEARS AND QUARTERS TO DIFFER
MATERIALLY FROM THOSE EXPRESSED IN ANY FORWARD-LOOKING STATEMENTS, ORAL OR
WRITTEN, MADE BY OR ON BEHALF OF THE COMPANY.
The Company's business and future operating results are subject to
potential fluctuations due to a number of factors including the following:
Variability of Operating Results; Possibility of Future Losses. The
Company's operating results for the year ended April 30, 2000 would have
resulted in a profit of $8.8 million instead of a profit of $10.0 million if
they had not included a credit of $0.8 million from a vendor as a result of
various negotiations and $0.4 million profit from the sale of inventory
previously reserved. Additionally, the Company's operating results for fiscal
1999 would have resulted in a loss of $1.5 million instead of a profit of $0.2
million if they had not included $1.7 million of credits received from vendors
as a result of various negotiations. Further, the Company's operating results in
fiscal 1998 and 1997 resulted in losses of $18.9 million and $4.0 million
respectively. During the fiscal years 1998 through most of 1999 and before, the
Company experienced significant negative cash flow from operations. There can be
no assurance that the Company will be able to generate revenue growth, or that
any revenue growth that is achieved can be sustained. To the extent that
increases in operating expenses precede and are not subsequently followed by
increased revenues, the Company's business, results of operations and financial
condition would be materially adversely affected. Although the Company has
reported profits for the nine most recent consecutive quarters, there can be no
assurance that the Company will be able to sustain such profitability in the
future.
Semiconductor Industry. The semiconductor industry is highly cyclical and
has been subject to significant economic downturns at various times, often in
connection with, or in anticipation of, maturing product cycles and declines in
general economic conditions. Downturns of this type occurred in calendar years
1997 and 1998 and presently appear to be occurring commencing in the third
quarter of fiscal 2001. Such downturns are characterized by diminished product
demand, accelerated erosion of average selling prices and gross margins, and
production overcapacity, and in some cases such downturns have lasted more than
a year. Accordingly, 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. For example, the
Company experienced accelerated erosion of average selling prices caused by
adverse industry-wide conditions in years ended April 30, 1997, 1998 and
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calendar 1999 and incurred substantial losses during that period. The Company
anticipates continued price and other competitive pressures, which adversely
affected fiscal years ended April 30, 1997, 1998 and 1999 operating results, to
adversely affect the Company's future operating results. Our continued success
depends in large part on the continued growth of various electronics industries
that use semiconductors. The improved market conditions we experienced in
calendar year 1999 and the first ten months of calendar year 2000 appear to have
declined significantly. During the quarter ended January 31, 2001, the Company
experienced decreases in orders from customers and found that lower selling
prices were necessary to remain competitive in the market. During the last two
months of calendar 2000 and the first two months of calendar 2001, the Company
has experienced decreases in the number of units sold and the unit selling
prices, which may be indicative of a downturn in the semiconductor industry. We
expect that trend to continue into the fourth quarter of fiscal 2001. We attempt
to identify changes in market conditions as soon as possible; however, the
dynamics of the market make prediction of and timely reaction to such events
difficult. Our business could be harmed in the future by cyclical downturns in
the semiconductor industry or by slower growth by any of the markets served by
our customers' products.
Fluctuations in Operating Results. The Company's operating results have
historically been and in future quarters may be adversely affected or otherwise
fluctuate due to factors such as timing of new product introductions and
announcements by the Company and its competitors, fluctuations in customer
demand for the Company's products, volatility in supply and demand affecting
market prices generally (such as the increases in supply of competitive products
and significant declines in average selling prices experienced by the Company in
the fiscal years ended April 30, 1999, 1998 and 1997), increased expenses
associated with new product introductions or process changes, increased
expenditures related to expanding the Company's sales channels, gains or losses
of significant customers, timing of significant orders of the Company's
products, fluctuations in manufacturing yields, changes in product mix, wafer
price increases due to increased market demand, prices charged by the Company's
suppliers and foreign currency fluctuations and general economic conditions. The
Company anticipates that a significant portion of its revenue will be derived
from a limited number of large orders, and the timing of receipt and fulfillment
of any such orders is expected to cause material fluctuations in the Company's
operating results, particularly on a quarterly basis.
Due to the foregoing factors, quarterly revenue and operating results are
difficult to forecast. The Company's expense levels are based, in significant
part, on the Company's expectations as to future revenue and are therefore
relatively fixed in the short term. If revenue levels fall below expectations,
as has occurred during the years ended April 30, 1999, 1998 and 1997, net income
is likely to be disproportionately adversely affected because a proportionately
smaller amount of the Company's expenses varies with its revenue. There can be
no assurance that the Company will be able to achieve or maintain profitability
on a quarterly or annual basis in the future. Due to the foregoing factors, the
Company's operating results may fall below the expectations of investors, which
could have a material adverse effect on the market price of the Company's Common
Stock. Reductions in revenue expectations can also require the Company to take
additional reserves against inventory valuations based upon the reduced
likelihood that the Company will be able to liquidate its inventories within a
reasonable period of time at profitable prices. Based on the factors noted
herein, we may experience substantial period-to-period fluctuations in operating
results.
New Product Development and Technological Change. The markets for the
Company's products are characterized by rapidly changing technology and product
obsolescence. The timely introduction of new products at competitive
price/performance levels is a key factor to the success of the Company's
business. In particular, the Company's future success will depend on its ability
to develop and implement new design and process technologies which enable the
Company to achieve higher product densities and thereby reduce product costs.
For example, most of the Company's products are currently designed and
manufactured using a 0.8 micron CMOS EEPROM process or a 0.6 micron Flash memory
process. There can be no assurance that the Company will be able to select and
develop new products and technologies and introduce them to the market in a
timely manner and with acceptable fabrication yields and production costs.
Furthermore, there can be no assurance that the Company's products will achieve
market acceptance. The failure of the Company to complete and introduce new
products at competitive price/performance levels could materially and adversely
affect the Company's business, financial condition and operating results. Delays
in developing new products, achieving volume production of new products,
successfully completing technology transitions with acceptable yields and
reliability or the lack of commercial acceptance of new products introduced by
the Company, could have a material adverse effect on the Company's business,
financial condition and results of operations.
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Dependence on a Small Number of Manufacturers. The Company does not
manufacture the semiconductor wafers used for its products. Oki Electric
Industry, Co., Ltd. (Oki) in Japan has supplied wafers to the Company since 1987
and was the Company's sole foundry source until the quarter ended April 30,
2000. At this time, an additional foundry, Xfab, provides a limited number of
products to the Company and the volumes are considerably less than Oki currently
provides. The Company does not have a wafer supply agreement with Xfab at this
time and instead purchases wafers on a purchase order and acceptance basis. The
Company's almost exclusive reliance on these independent foundries involves a
number of risks including the risk of inadequate wafer supplies to meet the
Company's production needs, increased prices charged by those independent
foundries, the unavailability of or interruption in access to required or more
cost effective process technologies, reduced control over delivery schedules,
manufacturing yields and costs, and the risks associated with international
operations more fully described below. In view of the recent increase in demand
for semiconductor products, the Company has not been able to obtain sufficient
increased quantities of wafers from Oki to fulfill some of the current customer
demand. Although the Company has a wafer purchase agreement with UMC for certain
Flash products which runs through February 2006, due to declining Flash bookings
and other circumstances, the Company has not ordered any wafers from UMC since
December 1997.
On September 6, 2000, the Company announced an agreement with Oki that will
result in a significant increase in foundry capacity for a one year period that
commenced in September 2000 in return for two payments totaling $10.0 million.
Most of the $10.0 million has been expensed in the nine months ended January 31,
2001 and the remainder will be recognized in the quarter ending April 30, 2001.
If market conditions were to deteriorate significantly before the agreement ends
in August 2001, the Company could be expensing a portion of such payments during
a period in which the increased wafer deliveries are no longer beneficial to the
Company. Such conditions would result in an increase to cost of sales, decreased
gross profits and decreased net income. To address the Company's wafer supply
concerns, the Company plans to continue working on expanding its primary foundry
capability at Oki and its secondary foundry capability with Xfab at that
foundry's facility in Lubbock, Texas. Xfab is owned by Elex NV which is a 31.9%
shareholder of the Company. The addition of Xfab as a second foundry source
could enable the Company to reduce the risks associated with the sourcing and
quantity of its wafer supply and thereby improve control over an important
component of its business; however, there can be no assurance that sufficient
capacity will be available from Xfab. Additionally, there can be no assurance
that sufficient capacity will continue to be available from Oki in the future or
that capacity will be available from another manufacturer at prices acceptable
to the Company. Even if such capacity is available, the qualification process
and time required to make the foundry fully operational for the Company could
take many months, or longer, and be subject to the other factors described under
"Semiconductor Manufacturing Risks" below. The loss of Oki as a supplier, the
inability of the Company to obtain additional capacity at Oki or to qualify Xfab
for additional products or other wafer manufacturers for desired foundry
capacity, or any other circumstances causing a significant interruption in the
supply of semiconductor wafers to the Company would have a material adverse
effect on the Company's business, financial condition and results of operations.
Semiconductor Manufacturing Risks. The manufacture of semiconductor wafers
is highly complex and sensitive to a wide variety of factors and, as is typical
in the semiconductor industry, the Company's outside wafer foundries from time
to time have experienced lower than anticipated production yields. The amount of
time to develop alternative foundry sources can be lengthy and the expense
considerable. Furthermore, the yield of satisfactory product is often
substandard during the initial developmental stages when the process is being
initiated. There can be no assurance that the Company will continue to receive
sufficient quantities of wafers at favorable prices on a timely basis, if at
all, or that the Company will be able to attain higher levels of wafer supply as
demand requires. Material disruptions in the supply of wafers as a result of
manufacturing yield or other manufacturing problems are not uncommon in the
semiconductor industry. The Company may also be subject to production transition
delays. There can be no assurance that the Company will not experience such
problems in the future. Such delays and reductions can result in cancellations
of customer orders thereby adversely affecting the Company's ability to generate
future revenues. The loss of Oki as a supplier, the failure to further develop
Xfab as a reliable foundry in an expeditious and cost-effective manner, any
prolonged inability to obtain adequate yields or deliveries from Oki or Xfab, or
any other circumstance that would require the Company to seek and qualify
alternative sources of supply of such products, could delay shipments, result in
the loss of customers and have a material adverse effect on the Company's
business and operating results. Although the Company is exploring and seeking to
develop alternative wafer supply sources such as Xfab, there can be no assurance
that it will be able to obtain such alternative sources or that the Company will
have adequate facilities available. Failure to have such supplies
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available would have a material adverse effect on the Company's business,
financial condition and results of operations.
Inventory. The cyclical nature of the semiconductor industry periodically
results in oversupply or shortages of wafer fabrication capacity such as the
Company has experienced from time to time. Since the Company must order products
and build inventory substantially in advance of product shipments, there is a
risk that the Company will forecast incorrectly and produce excess or
insufficient inventories of particular products because demand for the Company's
products is volatile and customers place orders with short lead times. The
ability of the Company's customers to reschedule or cancel orders without
significant penalty could adversely affect the Company's liquidity, as the
Company may be unable to adjust its purchases from its wafer suppliers to match
such customer changes and cancellations. There can be no assurance that the
Company's inventory will be reduced by the fulfillment of customer orders or
that in the future the Company will not produce excess quantities of its
products. To the extent the Company produces excess inventories of particular
products, the Company's operating results could be adversely affected by charges
that the Company could recognize due to significant reductions in demand for its
products, rapid declines in the market value of inventory resulting in inventory
writedowns or other related factors. For example, during the last half of fiscal
1998, the Company recorded charges of approximately $7.5 million due to the
rapid decrease in demand for and the selling prices for the Company's products.
Such adjustments amounted to less than $0.5 million in fiscal 1999 and were not
material in fiscal 2000. Adjustments in the first nine months of fiscal 2001
have totaled $3.1 million. The additional reserves of $3.1 million taken in the
first three quarters of fiscal 2001 are offset by the release of $2.0 million of
inventory reserves taken in previous periods relating to products that were sold
during fiscal 2001.
In addition, in fiscal 1998, the Company's ability to forecast future
demand and selling prices diminished. It is the policy of the Company to fully
reserve all inventory that is not expected to be sold in a reasonable period of
time from the balance sheet date, generally within the ensuing six months. As a
result of a reduction in estimated demand for the Company's products, the
Company provided additional reserves for excess quantities and obsolescence for
certain products, primarily the Company's Flash and EEPROM products. The rapid
erosion of selling prices also left the Company with significant amounts of
inventory with a carrying value that exceeded its current selling price
resulting in adjustments to the carrying value of the inventory to the lower of
cost or market value. There can be no assurance that the Company will not suffer
similar reductions in values of its inventories in the future or that the
Company will be able to liquidate its inventory at acceptable prices.
Dependence on Outsourced Engineering Resources. The Company has had an
arrangement since 1995 to obtain engineering services from Lxi Corporation
(Lxi), a provider of engineering services, of which our officers Messrs. Vanco,
Voiter and Gay own approximately 91%, 3% and 1%, respectively. Lxi provides
these services through Essex com SRL (Essex), its wholly owned subsidiary in
Romania. The aggregate number of hours of engineering services provided to the
Company varies by quarter. As of January 31, 2001, Essex employed the equivalent
of approximately 12 full-time engineers to perform services relating to key
development projects including development, design, layout and test program
development services. There can be no assurance that Lxi can continue to supply
a sufficient number of engineers to fulfill the Company's requirements for
outsourced engineering services or that the Company will be able to procure
engineering services from an additional source in a timely manner. The loss of
Lxi as a supplier of outsourced engineering services, the inability of the
Company to obtain a new supplier of such services, or any other circumstances
causing a significant interruption in the supply of engineering resources to the
Company would have a material adverse effect on the Company's business,
financial condition and results of operations.
Dependence upon Key Personnel. The Company's ability to operate
successfully will depend, to a large extent, upon the continued service of
certain key employees, and the continued ability to attract and retain
additional highly qualified personnel. Competition for such personnel,
particularly for highly skilled design, process and test engineers, is intense
and there can be no assurance that the Company can retain such personnel or that
it can attract other highly qualified personnel. The loss of or failure to
attract and retain any such highly qualified personnel could have a material
adverse affect on the Company's business, financial condition and results of
operations.
International Operations. For the three month and nine month periods ended
January 31, 2001, international sales comprised 65% and 63% of the Company's
product sales. Additionally, for fiscal years 2000, 1999 and 1998, international
sales accounted for approximately 60%, 41% and 64%, respectively, of the
Company's product sales. The decrease in international sales in 1999 was
primarily attributable to the transition in Japan from Marubun Corporation, the
Company's former distributor, who resigned in fiscal 1998, to various smaller
alternative distributors that serve similar markets and the inability of the
Company to compete with the low selling prices in
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certain Far East markets. In fiscal 2000, the Company was able to reenter
certain Far East markets, contributing to the increased international sales. The
Company expects that international sales will continue to represent a
significant portion of its product sales in the future. The Company's
international operations may be adversely affected by fluctuations in exchange
rates, imposition of government controls, political and financial instability,
trade restrictions, changes in regulatory requirements, difficulties in staffing
international operations and longer payment cycles. All sales are invoiced and
paid in dollars, reducing the Company's direct exposure to currency
fluctuations. Except for Yoshikawa Semiconductor in Japan, a provider of wafer
sorting services, and certain contract personnel costs and incidental
manufacturing supply purchases in Thailand, over 98% of the Company's purchases
are in US dollars, minimizing any direct currency fluctuation risk. In addition,
the Company's business is subject to other risks generally associated with doing
business with foreign subcontractors including, but not limited to, foreign
government regulations, political and financial unrest which may cause
disruptions or delays in shipments to the Company's customers or access to the
Company's inventories. There can be no assurance that these or other factors
related to international operations will not have a material adverse affect on
the Company's business, financial condition and results of operations.
Competition. The semiconductor industry is intensely competitive and has
been characterized by rapid price erosion, declining gross margins, rapid
technological change, product obsolescence and heightened international
competition in many markets. Average selling prices in the semiconductor
industry generally, and for the Company's products in particular, have decreased
significantly and rapidly over the life of each product. The Company expects
that average selling prices for its existing products will decline rapidly in
the future and that average selling prices for each new product will decline
significantly over the life of the product. Declines in average selling prices
for 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.
The Company competes with major domestic and international semiconductor
companies, many of which have substantially greater financial, technical, sales,
marketing, production, distribution and other resources. There can be no
assurance that the Company will be able to compete successfully in the future.
The Company's more mature products, such as Serial and Parallel EEPROM devices,
compete on the basis of product performance, price and customer service. The
Company believes it competes successfully with respect to each of these
competitive factors; however price competition is significant and expected to
continue. Principal competitors with respect to the Company's EEPROM products
currently include STMicroelectronics, Atmel, Microchip, Fairchild Semiconductor
and Xicor, all of which have substantially greater resources than the Company.
The market for Flash memory products has been characterized by long
production cycles, irregular yields, competing technologies and, particularly
since the first quarter of fiscal 1997, intense price competition resulting in
major reductions in average selling prices and corresponding reductions in
margins. The Company's Flash memory products compete on the basis of product
performance, price and customer service. However, given the development of
higher density/lower cost products and the intense price competition prevalent
for these products, there can be no assurance that the Company will be able to
compete successfully in the future against its competitors on the bases of these
or other competitive factors.
Flash Memory Market. A significant amount of the Company's net revenues
during 2000, 1999 and 1998 were derived from sales of Flash memory products. The
market for Flash memory products has been characterized by intense price
competition, long production cycles, inconsistent yields, competing
technologies, rapidly declining average selling prices, declines in gross
margins and intense overall competition. The Company's fiscal 1999, 1998 and
1997 operating results were adversely affected by intense price competition
caused by increased supplies of products and other adverse industry-wide
conditions. Intel and other competitors (which include Advanced Micro Devices,
Atmel, Fujitsu, Hitachi, Micron, Mitsubishi, STMicroelectronics, Sharp, Texas
Instruments and Toshiba) are expected to further increase Flash memory
production. Most of these competitors are manufacturing and selling devices with
larger memories which are utilized in more recently developed products such as
digital cameras. Due to the intense competition, limited development resources
and other factors, the Company has decided not to develop any of the higher
density Flash memory devices at this time. There can be no assurance that the
Company will be able to sustain the market acceptance for its Flash memory
products. The Company anticipates continued price and other competitive
pressures, which adversely affected fiscal 1997, 1998 and 1999 operating
results, to adversely affect the Company's future operating results.
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Need for Additional Capital. The Company has incurred significant losses or
experienced significant negative cash flow from operations during several recent
years. Such negative cash flow during fiscal 1999, 1998 and 1997 significantly
reduced the Company's available capital. During fiscal 1999, the Company
successfully took steps to address and/or resolve issues relating to its poor
cash flow position. Although as of January 31, 2001, the Company had cash on
hand of $32.6 million and the ability to draw up to $3.0 million additional cash
from its bank, there can be no assurance that the Company will continue to
generate sufficient revenue and profits to fund its operations. The Company has
pursued many measures designed to reduce expenses and conserve its cash in prior
periods when it experienced decreased or negative cash flow and it continues to
monitor expenses and to conserve its available cash. Furthermore, to the extent
the Company suffers any adverse effects to its revenues or margins because of
delays in new product introductions, price competition or other competitive
factors, the Company's cash position and its business, operating results and
financial condition will be adversely affected.
The Company may seek additional equity or debt financing to address its
working capital needs and to provide funding for capital expenditures. There can
be no assurance that additional funding will be available at acceptable terms,
if at all. If the Company is successful in raising additional funds through the
issuance of equity securities, existing stockholders of the Company could
experience significant dilution or the securities may have rights, preferences
or privileges senior to those of the Company's Common Stock. If adequate funds
are not available to us or are not available on acceptable terms, further
reductions in the Company's operating expenses and capital expenditures may be
required to continue operations, either of which could have a material adverse
effect on the Company's business, operating results and financial condition.
Volatility of Stock Price. The Company's stock price has been and may
continue to be subject to significant volatility. Any shortfall in revenues or
earnings from levels expected or projected by investors or others could have an
immediate and significant adverse effect on the trading price of the Company's
Common Stock in any given period. In addition, the stock market in general has
experienced extreme price and volume fluctuations particularly affecting the
market prices for many high technology companies and small capitalization
companies, and these fluctuations have often been unrelated to the operating
performance of the specific companies. These broad fluctuations may adversely
affect the market price for the Company's Common Stock.
Delinquencies to Customers. Due to the constraints in the Company's wafer
supply, it has been unable to fulfill all its customers' orders according to the
schedule originally requested. Although the Company is striving to increase its
supply of wafers and communicate to its customers the scheduled delivery dates
that it believes that it can reasonably expect to meet, there can be no
assurance that the customers will accept the alternative delivery date or not
seek cancellation of its outstanding orders. The Company's operating results
have historically been and in future quarters may be adversely affected or
otherwise fluctuate due to factors such as timing of new product introductions
and announcements by the Company and its competitors, fluctuations in customer
demand for the Company's products, volatility in supply and demand affecting
market prices generally (such as the increases in supply of competitive products
and significant declines in average selling prices experienced by the Company in
recent fiscal years).
Dependence on Proprietary Technology; Risk of Intellectual Property
Litigation. In the semiconductor industry, companies place extensive reliance
upon their intellectual property and proprietary technology and it is typical
for companies to receive notices from time to time that allege infringement of
patents or other intellectual property rights of others. There can be no
assurance that the Company will not receive any such notification or that
proceedings alleging infringement of intellectual property rights will not be
commenced against the Company in the future. In such event, there can be no
assurances that the Company could obtain any required licenses of third party
intellectual property rights or could obtain such licenses on commercially
reasonable terms. Failure to obtain such a license in any event could require
the Company to cease production of its products until the Company develops a
non-infringing design or process. Moreover, the cost of litigation of any such
claim or damages resulting therefore could be substantial and could materially
and adversely affect the Company's business, financial condition and results of
operations.
Limited Market for the Company's Securities. The Company's common stock was
traded on the NASDAQ National Market from May 1993 until it was delisted in
August 1998 for sustained trading below the minimum level of $1.00 per share
required by the NASDAQ stock exchange for continued listing. The Company's stock
was traded on the Over-The-Counter Bulletin Board market until September 6, 2000
when the Company was relisted on the NASDAQ SmallCap market. The
over-the-counter market was generally less visible to investors and therefore
the Company was unable to meet the liquidity requirements of some major
commercial, institutional and private investors thus limiting the market for the
Company's securities. The Company submitted a request on October 16,
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2000 that its securities be listed on the National Market, but due to general
market and other conditions, its stock closed below the $5.00 price per share
which is required to qualify for National Market listing and NASDAQ closed the
listing application. Management intends to apply again for NASDAQ National
Market listing if and when its shares trade for an extended period above the
$5.00 level, but is unable to ascertain the amount of time NASDAQ will take to
consider such application, if NASDAQ will reply favorably to such application
or, if additional information is requested, how much time and effort will be
required on the part of the Company's management and legal representatives to
adequately demonstrate and verify the Company's qualifications.
Customer Concentration. A relatively small number of customers have
accounted for a significant portion of the Company's net revenue in the past.
For the nine months ended January 31, 2001, shipments to Future Electronics,
Inc., a distributor principally in North America represented 10% of the
Company's revenues. For the year ended April 30, 2000, shipments to Memec (Asia
Pacific) Ltd., a distributor in Asia, Future Electronics, Inc. and Yosun
Industrial Corp., a reseller located in Taiwan each represented more than ten
percent of the Company's revenues (13%, 12% and 11% respectively). During fiscal
years 1999 and 1998, the only customer which represented more than ten percent
of Catalyst's product revenue was Marubun Corporation, a Japanese distributor
(0% and 21%, respectively). Marubun resigned as a distributor effective in or
about March 1998. The Company has been working to develop alternative
distributors in Japan to replace Marubun. Such efforts take substantial time and
may never completely replace the sales volumes achieved through Marubun. 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.
We also do not typically enter into long-term contracts with our customers
and we cannot be certain as to future order levels from our customers. When we
do enter into a long-term contact, the contract is generally terminable at the
convenience of the customer. An early termination or delay in shipments by one
of our major customers could harm our financial results, as it is unlikely that
the Company would be able to rapidly replace that revenue source.
Backlog. Due to possible customer changes in delivery schedules and
cancellations of orders, our backlog at any particular date is not necessarily
indicative of actual sales for any succeeding period. A reduction of backlog
during any particular period or the failure of our backlog to result in future
revenue could harm our business.
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.
Earthquakes and other Natural Disasters. Our corporate headquarters are
located in California near major earthquake faults. In addition, one of our
foundries is located near fault lines. In the event of a major earthquake or
other natural disaster near our headquarters, our operations could be harmed.
Takeover Resistive Measures. The Company's Stockholder Rights Plan, which
provides stockholders with certain rights to acquire shares of Common Stock in
the event a third party acquires more than 15% of the Company's stock, the
Board's ability to issue "blank check" Preferred Stock without stockholder
approval and the Company's staggered terms for its directors, could have the
effect of delaying or preventing a change in control of the Company.
Recently Issued Accounting Standards. In June 1998, the Financial
Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 requires that an entity
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. It further
provides criteria for derivative instruments to be designated as fair value,
cash flow and foreign currency hedges, and establishes respective accounting
standards for reporting changes in the fair value of the instruments. The
statement is effective for all fiscal quarters of fiscal years beginning after
June 15, 2000. Upon adoption of SFAS No. 133, the Company will be required to
adjust hedging instruments to fair value in the balance sheet, and recognize the
offsetting gain or loss as transition adjustments to be reported in net income
or other comprehensive income, as appropriate, and presented in a manner similar
to the cumulative effect of a change
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in accounting principle. The Company believes the adoption of this statement
will not have a significant effect on the results of operations.
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition", which provides
guidance on the recognition, presentation and disclosure of revenue in financial
statements filed with the SEC. SAB 101 outlines the basic criteria that must be
met in order to recognize revenue and provides guidance for disclosures related
to revenue recognition policies. In June 2000, the SEC issued SAB 101B, "Second
Amendment: Revenue Recognition in Financial Statements" which extends the
effective date of SAB 101 to the fourth fiscal quarter of fiscal years
commencing after December 15, 1999. At this time, management is still assessing
the impact of SAB 101 on the Company's financial position and results of
operations.
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation--an interpretation of APB Opinion No. 25" (FIN 44). This
Interpretation clarifies the definition of employee for the purposes of applying
Accounting Practice Board Opinion No. 25, Accounting for Stock Issued to
Employees (APB 25), the criteria for determining whether a plan qualifies as a
noncompensatory plan, the accounting consequences of various modifications to
the terms of a previously fixed stock option or award and the accounting for an
exchange of stock compensation awards in a business combination. This
Interpretation was effective July 1, 2000, but certain conclusions in this
Interpretation cover specific events that occur after either December 15, 1998,
or January 12, 2000. FIN 44 did not have a material effect on the financial
position or results of operations of the Company.
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CATALYST SEMICONDUCTOR, INC.
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, in the City of Sunnyvale and State of
California.
Date: March 14, 2001 By: /s/ Radu M. Vanco
------------------------------------------------------
Radu M. Vanco
Chairman of the Board of Directors, President and
Chief Executive Officer
Date: March 14, 2001 By: /s/ Thomas E. Gay III
------------------------------------------------------
Thomas E. Gay III
Vice President of Finance and Administration
and Chief Financial Officer
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