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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 OCTOBER 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
November 30, 2001 was 17,645,702.
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CATALYST SEMICONDUCTOR, INC.
TABLE OF CONTENTS
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements........................................................ 3
Unaudited Condensed Consolidated Balance Sheets
at October 31, 2001 and April 30, 2001.................................... 3
Unaudited Condensed Consolidated Statements of Operations for the three and
six month periods ended October 31, 2001 and 2000......................... 4
Unaudited Condensed Consolidated Statements of Cash Flows for the six
month periods ended October 31, 2001 and 2000............................. 5
Notes to Unaudited Condensed Consolidated Financial Statements.............. 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................... 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk................. 22
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K........................................... 23
SIGNATURES............................................................................... 24
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CATALYST SEMICONDUCTOR, INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
OCTOBER 31, APRIL 30,
2001 2001
---------- ---------
ASSETS
Current assets:
Cash ............................................. $28,332 $30,534
Accounts receivable, net ......................... 8,345 10,811
Inventories, net ................................. 8,927 8,349
Other assets ..................................... 592 895
------- -------
Total current assets ......................... 46,196 50,589
Property and equipment, net ........................ 2,479 2,589
------- -------
Total assets ................................. $48,675 $53,178
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit ................................... $ -- $ 2,025
Accounts payable ................................. 3,767 3,970
Accounts payable--related parties ................ 257 291
Accrued expenses ................................. 4,948 5,749
Deferred gross profit on shipments to distributors 1,362 1,972
Lease obligations ................................ 15 58
------- -------
Total liabilities ............................ 10,349 14,065
Stockholders' equity ............................... 38,326 39,113
------- -------
Total liabilities and stockholders' equity ... $48,675 $53,178
======= =======
See accompanying notes to the unaudited condensed
consolidated financial statements.
3
CATALYST SEMICONDUCTOR, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------------------- -------------------------------
OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31,
2001 2000 2001 2000
------------ ----------- ----------- ------------
Net revenues ...................... $ 9,166 $31,834 $ 19,682 $57,275
Cost of revenues .................. 6,507 15,193 12,985 27,579
-------- ------- -------- -------
Gross profit ...................... 2,659 16,641 6,697 29,696
Research and development .......... 985 987 2,050 2,141
Selling, general and administrative 2,850 3,742 5,667 7,030
-------- ------- -------- -------
Income (loss) from operations ..... (1,176) 11,912 (1,020) 20,525
Interest income, net .............. 199 161 463 191
-------- ------- -------- -------
Income (loss) before income taxes . (977) 12,073 (557) 20,716
Income tax provision .............. -- 1,650 49 2,100
-------- ------- -------- -------
Net income (loss) ................. $ (977) $10,423 $ (606) $18,616
======== ======= ======== =======
Net income (loss) per share:
Basic ........................... $ (0.05) $ 0.63 $ (0.03) $ 1.14
======== ======= ======== =======
Diluted ......................... $ (0.05) $ 0.50 $ (0.03) $ 0.90
======== ======= ======== =======
Weighted average common shares:
Basic ........................... 17,815 16,525 17,735 16,344
======== ======= ======== =======
Diluted ......................... 17,815 20,786 17,735 20,671
======== ======= ======== =======
See accompanying notes to the unaudited condensed
consolidated financial statements.
4
CATALYST SEMICONDUCTOR, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
SIX MONTHS ENDED
-------------------------------
OCTOBER 31, OCTOBER 31,
2001 2000
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ......................................... $ (606) $18,616
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation of property and equipment .................. 525 508
Provision for doubtful accounts receivable .............. 200 214
Provision for excess and obsolete inventory ............. (63) 865
Changes in assets and liabilities:
Accounts receivable ................................... 2,266 (6,336)
Inventories ........................................... (515) (2,645)
Other assets .......................................... 303 200
Accounts payable (including related parties) .......... (237) 1,927
Accrued expenses ...................................... (760) 2,849
Deferred gross profit on shipments to distributors .... (610) 1,830
-------- --------
Net cash provided by operating activities .......... 503 18,028
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash used for the acquisition of fixed assets ............. (415) (1,001)
-------- --------
Cash used in investing activities .................. (415) (1,001)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Common stock issuances .................................... 40 275
Cash used to repurchase common stock ...................... (262) --
Payment of line of credit ................................. (2,025) (3)
Payment of long-term debt and capital lease obligations ... (43) (98)
-------- --------
Net cash provided by (used in) financing activities (2,290) 174
-------- --------
Net increase (decrease) in cash and cash equivalents ........ (2,202) 17,201
Cash at beginning of the period ............................. 30,534 6,205
-------- --------
Cash at end of the period ................................... $ 28,332 $ 23,406
======== ========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid ............................................. $ -- $ 99
======== ========
Income taxes paid ......................................... $ 11 $ 375
======== ========
SUPPLEMENTAL NON-CASH INFORMATION:
Deferred compensation on exercised stock options .......... $ 41 $ 244
======== ========
See accompanying notes to the unaudited condensed
consolidated financial statements.
5
CATALYST SEMICONDUCTOR, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION:
In the opinion of the management of Catalyst Semiconductor, Inc. (Company),
the unaudited condensed consolidated interim financial statements included
herein have been prepared on the same basis as the April 30, 2001 audited
consolidated financial statements and include all adjustments, consisting of
only normal recurring adjustments, necessary to fairly state the information set
forth herein. The consolidated statements include the accounts of the Company's
wholly owned subsidiary, Nippon Catalyst KK, a sales organization in Japan.
Certain prior period balances have been reclassified to conform to the current
period presentation. The statements have been prepared in accordance with the
regulations of the Securities and Exchange Commission (SEC), 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 for the
year ended April 30, 2001. The results of operations for the six month period
ended October 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. However, during the one year period from November 2000 through
October 2001, the market for the Company's products has become 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 October 31, 2001, the Company has not had any
items of comprehensive income other than net income (loss).
NOTE 2 - NET INCOME (LOSS) PER SHARE:
Basic net income (loss) per share is computed by dividing net income (loss)
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 (loss) per share gives
effect to all dilutive potential common shares outstanding during a period. In
computing diluted net income (loss) 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.
6
A reconciliation of the numerators and denominators of the basic and
diluted income (loss) per share is presented below:
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------------------- ------------------------------
OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31,
2001 2000 2001 2000
------------ ----------- ----------- -----------
Net income (loss) .......................... $ (977) $10,423 $ (606) $18,616
======= ======= ======== =======
Shares calculation:
Weighted average shares outstanding--basic 17,815 16,525 17,735 16,344
Effect of dilutive securities:
Stock options ............................ -- 4,261 -- 4,327
------- ------- -------- -------
Weighted average shares outstanding--diluted 17,815 20,786 17,735 20,671
======= ======= ======== =======
Net income (loss) per share:
Basic .................................... $ (0.05) $0.63 $ (0.03) $ 1.14
======= ======= ======== =======
Diluted .................................. $ (0.05) $0.50 $ (0.03) $ 0.90
======= ======= ======== =======
Options to purchase 6,186,000 shares of common stock at prices from $0.11
to $9.50 per share outstanding during the quarter ended October 31, 2001 and
options to purchase 30,000 shares of common stock at $9.50 per share outstanding
during the quarter ended October 31, 2000 were not included in the computation
of diluted income (loss) per share because the inclusion of such options would
have been antidilutive.
Options to purchase 6,186,000 shares of common stock at prices from $0.11
to $9.50 per share outstanding during the six month period ended October 31,
2000 and options to purchase 30,000 shares of common stock at $9.50 per share
outstanding during the six month period ended October 31, 1999 were not included
in the computation of diluted income (loss) per share because the inclusion of
such options would have been antidilutive.
NOTE 3 - BALANCE SHEET COMPONENTS (IN THOUSANDS):
OCTOBER 31, APRIL 30,
2001 2001
------------ ----------
Accounts receivable:
Accounts receivable.............................................. $ 9,295 $ 11,561
Less: Allowance for doubtful accounts............................ (950) (750)
--------- --------
$ 8,345 $ 10,811
========= ========
Inventories:
Work-in-process.................................................. $ 6,493 $ 6,113
Finished goods................................................... 2,434 2,236
-------- --------
$ 8,927 $ 8,349
======== ========
Property and equipment:
Engineering and test equipment................................... $ 9,992 $ 9,658
Computer hardware and software................................... 3,649 3,597
Furniture and office equipment................................... 1,373 1,344
-------- --------
15,014 14,599
Less: accumulated depreciation and amortization.................. (12,535) (12,010)
-------- --------
$ 2,479 $ 2,589
======== ========
Accrued expenses:
Accrued income taxes............................................. $ 2,071 $ 2,083
Accrued employee compensation.................................... 1,303 1,612
Other............................................................ 1,574 2,054
-------- ---------
$ 4,948 $ 5,749
======== =========
7
NOTE 4 - LINE OF CREDIT:
As of April 30, 2001, the Company had approximately $2.0 million of secured
loans owed to a bank. As of the same date, the Company had $2.0 million cash
deposited at the same bank in an interest bearing account to serve as
collateral. As of April 30, 2001, under the terms of its borrowing agreement,
the Company was eligible to borrow approximately $3.0 million. Also, under the
terms of the borrowing agreement, the Company could borrow the lesser of $5.0
million or an amount determined by a formula applied to eligible accounts
receivable. Amounts borrowed under the borrowing agreement were secured by
accounts receivable and were subject to compliance with loan covenants. The
borrowing agreement bore interest at a variable rate equal to the bank's prime
lending rate (7.5% at April 30, 2001) plus 2.5%. On June 30, 2001, the Company
repaid the outstanding balance and cancelled the agreement.
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, $55,000 of which was recognized during the six month period ended
October 31, 2001. An aggregate of $368,000 of such expense has been recognized
through October 31, 2001 and $149,000 remains to be recognized in future
periods.
NOTE 6 - CONTINGENCIES:
On April 17, 2001, Xicor Corporation (Xicor) filed a complaint against the
Company in the United States District Court for the District of Delaware. The
complaint alleges that certain products that the Company has recently introduced
infringe on a patent that Xicor obtained in 1988 relating to the design of a
certain type of digital potentiometer. Xicor is seeking royalties on past
revenues in addition to enjoining the Company from any further sales of the
products in question. The Company does not agree with such allegations and
intends to vigorously defend itself against the suit. Since the products
included in the suit have only recently been introduced, revenues from those
products have not been material.
In 1989, the Company entered into a license agreement with Philips Export
B.V. and U.S. Philips Corporation (Philips) to license technology relating to
their I2C bus technology. The Company has received a communication from Philips
suggesting that royalties may be due and owing on past sales of certain
products. The Company is currently investigating this claim.
In the normal course of business, the Company receives notification of
threats of legal action in relation to claims of patent infringement by the
Company. Although no assurances can be given to the results of these claims,
management does not believe that any such results will have a material adverse
impact on the Company's financial condition, results of operations or cash
flows.
NOTE 7 - 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 31.2% 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.
During the six months ended October 31, 2001, the Company's purchases from Xfab
totaled $554,000. As of October 31, 2001, the total amount owed Xfab was
$76,000. Mr. Roland Duchatelet, the Chairman and CEO of Elex NV, serves as a
member of the Company's Board of Directors.
8
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 October 31, 2001, Essex employed the equivalent of
approximately 11 full-time 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. During the six months ended October 31, 2001 the
Company recorded $381,000 of engineering fees from Lxi for engineering design
services. As of October 31, 2001 the total amount owed to Lxi was $181,000.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements that are subject to
risks and uncertainties. For such statements, we desire to take advantage of the
"Safe Harbor" provisions of the Private Securities Litigation Reform Act of 1995
and of Section 21E of and Rule 3b-6 under the Securities Exchange Act of 1934.
Such forward-looking statements include, without limitation, statements
regarding our expectations, intentions or future strategies and involve known
and unknown risks, uncertainties and other factors. All forward-looking
statements included in this report are based on information available to us on
the date of filing, and we assume no obligation to update such forward-looking
statements.
OVERVIEW
Catalyst Semiconductor, Inc. (Catalyst, us, we, our), incorporated October
8, 1985, designs, develops and markets nonvolatile memory semiconductor products
including Serial and Parallel EEPROMs, Flash memory and Mixed Signal devices.
Revenues are derived from sales of semiconductor products designed by us and
manufactured by other companies.
Our 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 fiscal 1999, the market for certain FLASH and
EEPROM devices, which comprise the majority of our business, experienced an
excess market supply relative to demand which resulted in a significant downward
trend in prices. During fiscal 2000 and the first half of fiscal 2001, we
reduced our manufacturing costs, increased the efficiency of our manufacturing
operations and the selling prices for certain of our products increased,
contributing to increased gross margin percentages. During the second half of
fiscal 2001 and the first half of fiscal 2002, we experienced cancellations of
orders by our customers, increased supplies of competitive products and
decreasing revenues. Although cancellations have diminished from the rate
experienced in the last two quarters of fiscal 2001, the results for the six
months ended October 31, 2001 reflect the continuing competitive pressures on
our revenues, gross margins and net profits. We could experience increases in
our manufacturing costs and further downward trends in product pricing in the
future which could adversely affect our 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, we defer revenue recognition until the distributor sells the
product to the end customer. Total revenues decreased 71% to $9.2 million for
the quarter ended October 31, 2001 from $31.8 million for the quarter ended
October 31, 2000. The decrease is primarily attributable to a decrease in the
average selling prices of our products and increased sales of our lower priced
products. In comparison to our previous fiscal quarter, total revenues decreased
12% to $9.2 million for the quarter ended October 31, 2001 from $10.5 million
for the quarter ended July 31, 2001. The decrease is primarily attributable to a
decrease in the average selling prices of our products. For the six months ended
October 31, 2001, total revenues decreased 66% to $19.7 million from $57.3
million for the six months ended October 31, 2000. The decrease is primarily
attributable to a decrease in the number of units shipped and, to a lesser
degree, to a decrease in the average selling price of our products. For the six
months ended October 31, 2001, approximately 66% of our net product shipments
were to international customers compared with 60% of net product shipments
during fiscal 2001. All sales of our products are in US dollars, minimizing the
effects of currency fluctuations.
Gross Profit. Gross profit for the quarter ended October 31, 2001 was $2.7
million, or 29% of revenues, compared to a gross profit of $16.7 million, or 53%
of revenues, for the quarter ended October 31, 2000, a decrease of 84%. The
decrease in gross profit percentage is primarily due to decreased selling prices
in the market for our products. In comparison to our previous fiscal quarter,
gross profits decreased $1.3 million to $2.7 million, or 29% of revenues, for
the quarter ended October 31, 2001 from $4.0 million, or 38% of revenues, for
the quarter ended July 31, 2001. The decrease is primarily attributable to a
decrease in the average selling prices for our products. For the six months
ended October 31, 2001, gross profits of $6.7 million, or 34% of revenues
decreased by 77% from $29.7 million or 52% of revenues for the six months ended
October 31, 2000. The decrease is primarily attributable to deteriorating market
conditions for our products reflected by decreased average selling prices and
decreased unit shipments. During fiscal 2001, we paid $10.0 million to our
10
principal wafer supplier, Oki, to obtain increased wafer supplies. Such payments
were added to the cost of the inventory acquired during that period and included
in the cost of sales as the inventory is sold. As of April 30, 2001, our
inventory valuation included a portion of such costs to be charged to cost of
sales as the relevant inventory is sold. During the quarters ended October 31
and July 31, 2001, we had a lower gross profit attributable to our shipments of
the more expensive wafers purchased under the Oki agreement. Our remaining
inventory of the more expensive products has been charged to cost of sales and
is no longer included in our inventory valuation. It is our policy 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 twelve
months. We pay certain foreign manufacturing expenses in local currency,
primarily Baht in Thailand and Yen in Japan. Such expenses are not material to
us and the majority are paid within 30 days, minimizing the effects of currency
fluctuations.
Research and Development. Research and development (R&D) expenses consist
principally of salaries for engineering, charges from outside providers of
engineering services including the related party LXI, 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 were unchanged
at $1.0 million, or 11% of revenues, for the quarter ended October 31, 2001,
from $1.0 million, or 3% of revenues for the quarter ended October 31, 2000. In
comparison to our previous fiscal quarter, R&D expenses of $1.0 million or 11%
of revenues, for the quarter ended October 31, 2001 decreased $0.1 million from
$1.1 million or 10% of revenues for the quarter ended July 31, 2001. For the six
months ended October 31, 2001, R&D expenses were unchanged at $2.1 million, or
11% of revenues, compared to $2.1 million, or 4% of revenues for the six months
ended October 31, 2000.
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
decreased by 22% to $2.9 million, or 32% of revenues, for the quarter ended
October 31, 2001, from $3.7 million, or 12% of revenues, for the quarter ended
October 31, 2000. The decrease from last year is primarily attributable to
decreased expenses for sales and administrative personnel and decreased
commission expenses to outside manufacturers' representatives. In comparison to
our previous fiscal quarter, SG&A expenses of $2.9 million for the quarter ended
October 31, 2001 increased 4% from $2.8 million, or 27% of revenues for the
quarter ended July 31, 2001. The increase in SG&A expenses from the previous
quarter is primarily attributable to an increase in the provision for bad debt.
For the six months ended October 31, 2001, SG&A expenses decreased by 21% to
$5.7 million, or 29% of revenues, from $7.0 million, or 12% of revenues, for the
six months ended October 31, 2000. The decrease from the previous year is
primarily attributable to decreased commission expenses to outside
manufacturers' representatives and decreased expenses for sales and
administrative personnel.
Net Interest Income/Expense. Net interest income was $199,000 for the
quarter ended October 31, 2001, compared to net interest income of $161,000 for
the quarter ended October 31, 2000. The increase from a year ago is primarily
related to the interest earned on our increased cash balance and decreased
average outstanding borrowings. In comparison to our previous fiscal quarter,
net interest income was $199,000 for the quarter ended October 31, 2001,
compared to net interest income of $264,000 for the quarter ended July 31, 2001.
The decrease from the previous quarter is primarily related to the decrease in
the interest rate earned on our cash balance. For the six months ended October
31, 2001, our net interest income was $463,000, an increase from $191,000 for
the six months ended October 31, 2000. The increase from the previous year is
primarily due the interest earned on our increased cash balance and decreased
average outstanding borrowings.
Income Tax Provision. We recorded a provision for income taxes of zero for
the quarter ended October 31, 2001, compared to a provision of $1,650,000 or 14%
of net income before taxes for the quarter ended October 31, 2000. The decrease
is due to the loss that occurred during the quarter ended October 31, 2001. We
have recorded a provision of $49,000 for the six months ended October 31, 2001
compared to a provision of $2,100,000 or 10% of net income before taxes for the
six months ended October 31, 2000.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operations was $503,000 for the six months ended
October 31, 2001, which was due primarily to net loss of $606,000, adjusted for
depreciation and amortization of $525,000, an addition to the provision for
doubtful accounts of $200,000, reduction in the provision for excess and
obsolete inventory of $63,000 and a decrease in accounts payable and other
liabilities of $997,000 related to decreased sales and manufacturing activity, a
decrease in net accounts receivable of $2,266,000 and an increase in inventories
of
11
$1,113,000 which were also related to the decrease in production and sales
activity. For the six month period ended October 31, 2000, net cash of $18.0
million was provided by operations, principally by net income of $18.6 million,
adjusted for depreciation and amortization of $508,000, an addition to the
provision for doubtful accounts of $214,000, a provision for excess and obsolete
inventory of $0.9 million plus $1.9 million from the increase in accounts
payable due to the increasing manufacturing activity and $2.8 million from the
increase in accrued expenses and $1.8 million from the increase in deferred
gross profit on shipments to distributors. Such increase was partially offset by
$6.3 million used by the increase in accounts receivable due to the increased
sales activity and $2.6 million used for the increase in inventory.
Our investing activities used $415,000 during the six months ended October
31, 2001 and were related primarily to the acquisition of equipment for
manufacturing activities. Cash used in investing activities for the six months
ended October 31, 2000 was $1,001,000 which was primarily related to the
purchase of equipment for manufacturing activities.
Financing activities used $2.3 million during the six months ended October
31, 2001, consisting primarily of $2,025,000 for the payoff of our bank credit
line and $262,000 for the repurchase of our common stock. During the six months
ended October 31, 2000, the cash provided by financing activities was $174,000,
principally from the proceeds of stock option exercises.
In September 2001 we announced our intent to implement a stock repurchase
program. As a result of this repurchase program, during the quarter ended
October 31, 2001, we repurchased 130,000 shares of our common stock at a cost of
$262,000. Stock repurchased at fair market value at the date of each transaction
was accounted for at cost.
On June 30, 2001, we paid off the $2.0 million balance due on the line of
credit with our bank and ended the agreement. As of October 31, 2001, we had
accounts payable to various creditors in the amount of approximately $4.0
million. This amount is comprised of approximately $3.0 million for wafers and
inventory processing and approximately $1.0 million for other goods and
services.
Although management believes we have sufficient working capital resources
to continue our operations for at least the next twelve months, we may decide to
seek additional equity or debt financing to address our 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 us, if at all.
CERTAIN RISKS THAT MAY AFFECT OUR FUTURE RESULTS
OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE DUE TO MANY FACTORS AND ARE
DIFFICULT TO FORECAST.
Our operating results have historically been and in future quarters may be
adversely affected or otherwise fluctuate due to factors such as:
- fluctuations in customer demand for our 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 us in the two quarters ended October
31, 2001, the two quarters ended April 30, 2001, and during the fiscal
years April 30, 1999 and 1998),
- the timing of new product introductions and significant orders of our
products,
- increased expenses associated with new product introductions, process
changes and/or expanding our sales channels,
- gains or losses of significant customers,
- fluctuations in manufacturing yields,
- changes in our product mix,
- increases in wafer prices due to increased market demand,
- prices charged by our suppliers,
12
- foreign currency fluctuations, and
- general economic conditions.
We anticipate that a significant portion of our revenue will be derived from a
limited number of large orders, and we expect that the timing of receipt and
fulfillment of these orders will cause fluctuations which could be material to
our operating results, particularly on a quarterly basis.
Our quarterly revenue and operating results are difficult to forecast due
to the previously described factors. We base our expense levels, in significant
part, on our expectations as to future revenue and our expenses are therefore
relatively fixed in the short term. If our expected revenue levels fall below
our forecasts, as has occurred during the most recent four fiscal quarters and
during fiscal years ended April 30, 1999 and 1998, net income is likely to be
disproportionately adversely affected because a proportionately smaller amount
of our expenses vary with our revenue.
Our operating results may fall below the expectations of investors due to
the factors described above and could have a material adverse effect on the
market price of our Common Stock. Reductions in revenue expectations may also
require us to take additional reserves against inventory valuations based upon
the reduced likelihood that we will be able to liquidate our inventories within
a reasonable period of time at profitable prices. We may therefore experience
substantial period-to-period fluctuations in our operating results.
THE SEMICONDUCTOR INDUSTRY IS HIGHLY CYCLICAL IN NATURE.
We operate in a highly cyclical industry that has been subject to
significant economic downturns often in connection with, or in anticipation of,
maturing product cycles and declines in general economic conditions. This type
of downturn occurred in calendar years 1997 and 1998 and again during 2001. We
currently face and in the future may face diminished product demand, accelerated
erosion of average selling prices and gross margins, and production overcapacity
during such downturns, which may last for more than a year. Accordingly, we 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, we experienced accelerated erosion of average selling prices
caused by adverse industry-wide conditions during fiscal 1998 and throughout
calendar year 1999 and incurred substantial losses during that period. During
fiscal 2000, the semiconductor market rebounded from its cyclical decline which
had a favorable impact on both our revenues and our gross margins into fiscal
2001 through the quarter ended October 2000. During each of the fiscal quarters
ended January 2001, April 2001, July 2001 and October 2001, however, the market
for our products became more competitive as a result of increased availability
of products when demand was decreasing. Thus we anticipate continued price and
other competitive pressures to adversely affect our future operating results
similar to the adverse affects on our 1998 and 1999 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 have declined significantly. During the latter half of the
fiscal year ended April 30, 2001 and in the first half of fiscal 2002, we
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 ten months of calendar 2001, we
experienced decreases in the number of units sold and the unit selling prices,
which we believe to be indicative of a downturn in our industry. We expect that
trend to continue further into fiscal 2002. We attempt to identify changes in
market conditions as soon as possible; however, market dynamics make our
prediction of and timely reaction to such events difficult. Our business could
be harmed in the future by additional cyclical downturns in the semiconductor
industry or by slower growth by any of the markets served by our customers'
products.
OUR QUARTERLY OPERATING RESULTS ARE VARIABLE.
Our operating results vary from quarter to quarter. For example, our
operating results for the fiscal quarter ended October 31, 2001 would have
resulted in a loss of $1.3 million instead of a loss of $1.0 million if they had
not included $0.3 million profit from the sale of inventory previously reserved.
Additionally, our operating results for
13
the fiscal year ended April 30, 2001 would have resulted in a profit before
taxes of $27.0 million instead of a profit of $29.9 million if they had not
included $2.9 million profit from the sale of inventory previously reserved and
our 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, our operating results in fiscal 1998 resulted in losses of $18.9
million. We experienced significant negative cash flow from operations during
fiscal 1998 through most of fiscal 1999. We may not be able to generate revenue
growth and any revenue growth that is achieved may not be sustained. Our
business, results of operations and financial condition would be materially
adversely affected if operating expenses increase and are not subsequently
followed by increased revenues.
GENERAL ECONOMIC CONDITIONS MAY REDUCE OUR REVENUES AND HARM OUR BUSINESS.
As our business grows, we have become increasingly subject to the risks arising
from adverse changes in domestic and global economic conditions. Because of the
recent worldwide economic slowdown, and in the United States in particular, many
industries are delaying or reducing technology purchases. The impact of this
slowdown on us is difficult to predict, but it may result in reductions in
purchases of our products by our customers, longer sales cycles and increased
price competition. As a result, if the current economic slowdown continues or
worsens, we may fall short of our revenue expectations for any given quarter in
fiscal 2002 or for the entire year. These conditions would negatively affect our
business, financial condition and results of operations.
IF OUR PRODUCTS FAIL TO KEEP PACE WITH THE RAPID TECHNOLOGICAL CHANGES IN THE
SEMICONDUCTOR INDUSTRY, WE COULD LOSE CUSTOMERS AND REVENUE.
Our product markets are characterized by rapidly changing technology and
product obsolescence. A key factor to our business success is the timely
introduction of new products at competitive price and performance levels. In
particular, our future success will depend on our ability to develop and
implement new design and process technologies which enable us to achieve higher
product densities and thereby reduce product costs. For example, most of our
products are currently designed and manufactured using a 0.8 micron CMOS EEPROM
process or a 0.6 micron Flash memory process. We may not 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, our products may not achieve market acceptance. Our failure to
complete and introduce new products at competitive price/performance levels
could materially and adversely affect our business, financial condition and
operating results. Our business, financial condition and results of operations
could be materially adversely affected by delays in developing new products,
achievement of volume production of new products, successful completion of
technology transitions with acceptable yields and reliability, or the lack of
commercial acceptance of new products we introduce to the market.
WE DEPEND ON A SMALL NUMBER OF SUPPLIERS FOR THE SUPPLY OF WAFERS.
We do not manufacture the semiconductor wafers used for our products. Oki
Electric Industry, Co., Ltd. (Oki) in Japan has supplied wafers to us since 1987
and was our sole foundry source until the quarter ended April 30, 2000. At this
time, an additional foundry, Xfab, provides a limited number of products to us
and the volumes are considerably less than Oki currently provides. We do not
presently have a wafer supply agreement with Xfab and instead purchase wafers on
a purchase order and acceptance basis. Our almost exclusive reliance on these
independent foundries involves a number of risks, including:
- the risk of inadequate wafer supplies to meet our 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.
We are not always able to obtain sufficient increased quantities of wafers from
Oki to fulfill some of the current customer demand. Although we have a wafer
purchase agreement with UMC for certain Flash products which runs through
February 2006, due to declining Flash bookings and other circumstances, we have
not ordered any wafers from UMC since December 1997.
14
On September 6, 2000, we announced an agreement with Oki that resulted in a
significant increase in foundry capacity available to us for the one year period
that commenced in September 2000 in return for two payments totaling $10.0
million. These payments were added to the cost of inventories purchased during
the ten month period ended March 2001 and were reflected in our cost of sales as
the associated inventory was sold. As of April 30, 2001, our inventory valuation
included a portion of such costs to be charged to cost of sales as the relevant
inventory is sold. During the quarters ended July 31 and October 31, 2001, we
had a lower gross profit caused by our shipments of the more expensive wafers
purchased under the Oki agreement. The remaining inventory of the more expensive
products has now been included in our cost of sales in the quarter ended October
31, 2001.
To address our wafer supply concerns, we plan to continue working on
expanding our primary foundry capability at Oki and our secondary foundry
capability with Xfab at that foundry's facility in Lubbock, Texas. Xfab is owned
by Elex NV which is a 31.2% shareholder of Catalyst. The addition of Xfab as a
second foundry source has enabled us to reduce the risks associated with the
sourcing and quantity of our wafer supply and thereby improve control over an
important component of our business; however, sufficient capacity may not be
available from Xfab. Additionally, Oki may not continue to provide sufficient
capacity in the future and that capacity may not be available from another
manufacturer at prices acceptable to us. Even if such capacity is available, the
qualification process and time required to make the foundry fully operational
for us could take many months, or longer, and be subject to other factors
described below. Our business, financial condition and results of operations
could be materially adversely affected by:
- the loss of Oki as a supplier,
- our inability to obtain additional capacity at Oki,
- our inability to qualify Xfab for additional products,
- our ability to qualify other wafer manufacturers for desired foundry
capacity, or
- any other circumstances causing a significant interruption in our supply of
semiconductor wafers.
WE HAVE INCURRED SIGNIFICANT LOSSES OR EXPERIENCED SIGNIFICANT NEGATIVE CASH
FLOW FROM OPERATIONS DURING SEVERAL RECENT FISCAL YEARS.
We have incurred significant losses or experienced significant negative
cash flow from operations during several recent years. Such negative cash flow
during fiscal 1999 and 1998 significantly reduced our available capital. During
fiscal 1999, we successfully took steps to address and/or resolve issues
relating to our poor cash flow position. During the quarter ended October 31,
2001, we incurred a loss of $977,000 and cash on hand decreased by $142,000.
Although as of October 31, 2001, we had cash on hand of $28.3 million, we may
not continue to generate sufficient revenue and profits to fund our operations.
We have pursued many measures designed to reduce expenses and conserve our cash
in prior periods when we experienced decreased or negative cash flow and we
continue to monitor expenses and to conserve our available cash. Furthermore, to
the extent we suffer any adverse effects to our revenues or margins because of
delays in new product introductions, price competition or other competitive
factors, our cash position and our business, operating results and financial
condition will be adversely affected.
We may seek additional equity or debt financing to address our working
capital needs and to provide funding for capital expenditures. Additional
funding may not be available at acceptable terms, if at all. If we are
successful in raising additional funds through the issuance of equity
securities, our existing stockholders could experience significant dilution or
the securities may have rights, preferences or privileges senior to those of our
Common Stock. If adequate funds are not available to us or are not available on
acceptable terms, further reductions in our operating expenses and capital
expenditures may be required to continue operations, either of which could have
a material adverse effect on our business, operating results and financial
condition.
THE TRADING PRICE OF OUR COMMON STOCK COULD BE SUBJECT TO WIDE FLUCTUATIONS IN
RESPONSE TO A VARIETY OF FACTORS.
15
Our 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 our 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 our Common Stock.
THE MANUFACTURE OF SEMICONDUCTOR WAFERS IS HIGHLY COMPLEX AND SENSITIVE TO A
WIDE VARIETY OF FACTORS THAT MAY ADVERSELY AFFECT OUR ABILITY TO GENERATE FUTURE
REVENUES.
The manufacture of semiconductor wafers for our products is highly complex
and sensitive to a wide variety of factors typical in the semiconductor industry
such as:
- lower than anticipated production yields experienced by outside wafer
foundries from time to time,
- incurring the time and expense to develop alternative foundry sources,
- experiencing substandard yield during the initial developmental stages of a
new process,
- inability to receive sufficient quantities of wafers at favorable prices on
a timely basis, especially in periods of increased demand,
- material disruptions in the supply of wafers as a result of low
manufacturing yield or other manufacturing problems, and
- production transition delays.
Our ability to generate future revenues may be adversely affected by such delays
and reductions that result in the cancellation of customer orders. Thus, any of
the following events could delay shipments, result in the loss of customers and
have a material adverse effect on our business and operating results:
- 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, and
- any other circumstance that would require us to seek and qualify
alternative sources of supply of such products.
Although we are exploring and seeking to develop alternative wafer supply
sources such as Xfab, we may not be able to obtain such alternative sources nor
may we have adequate facilities available. Failure to have such supplies
available would have a material adverse effect on our business, financial
condition and results of operations.
INTENSE COMPETITION IN OUR MARKETS MAY LEAD TO REDUCED AVERAGE SELLING PRICES OF
OUR PRODUCTS, REDUCED SALES OF OUR PRODUCTS AND REDUCED GROSS MARGINS.
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 our products in particular, have decreased
significantly and rapidly over the life of each product. We expect that average
selling prices for our 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 our 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 our overall gross
margins, could cause a negative adjustment to the valuation of our inventories
and could materially and adversely affect our operating results.
We compete with major domestic and international semiconductor companies,
many of which have substantially greater financial, technical, sales, marketing,
production, distribution and other resources. We may not be able to compete
successfully in the future. Our more mature products, such as Serial and
Parallel EEPROM devices, compete on the basis of product performance, price and
customer service. We believe that we compete
16
successfully with respect to each of these factors; however price competition is
significant and expected to continue. Principal competitors with respect to our
EEPROM products currently include STMicroelectronics, Atmel, Microchip,
Fairchild Semiconductor and Xicor, all of which have substantially greater
resources than us.
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.
Our 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, we may
not be able to compete successfully in the future against its competitors on the
bases of these or other competitive factors.
WE PERIODICALLY EXPERIENCE AN OVERSUPPLY OR SHORTAGE OF WAFER FABRICATION
CAPACITY DUE TO VOLATILE DEMAND AND THUS WE RISK FORECASTING INCORRECTLY AND
PRODUCING EXCESS OR INSUFFICIENT INVENTORIES OF PARTICULAR PRODUCTS, WHICH MAY
ADVERSELY AFFECT OUR RESULTS.
We have previously experienced periodic oversupply or shortages of wafer
fabrication capacity due to the cyclical nature of the semiconductor industry.
Since we must order products and build inventory substantially in advance of
product shipments, we risk forecasting incorrectly and producing excess or
insufficient inventories of particular products. Demand for our products is
volatile and customers often place orders with short lead times. The ability of
our customers to reschedule or cancel orders without significant penalty could
adversely affect our liquidity, as we may be unable to adjust our purchases from
our wafer suppliers to match any customer changes and cancellations. Our
inventory may not be reduced by the fulfillment of customer orders and in the
future we may produce excess quantities of our products. To the extent we
produce excess inventories of particular products, our operating results could
be adversely affected by charges that we could recognize due to significant
reductions in demand for our products and/or 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, we recorded charges of
approximately $7.5 million due to the rapid decrease in demand for and the
selling prices of our products. Such adjustments amounted to less than $0.5
million in fiscal 1999 and were not material in fiscal 2000. Inventory reserve
adjustments in fiscal 2001 totaled $4.7 million which were offset by the release
of $2.0 million of inventory reserves taken in previous periods relating to
products that were sold during fiscal 2001. For the six months ended October
2001, we reserved inventory of $0.3 million which was offset by the release of
$0.3 million of inventory reserves taken in previous periods relating to
products that were sold during the quarter.
In addition, in fiscal 1998 and to some extent during fiscal 2001, our
ability to forecast future demand and selling prices diminished. It is our
policy to fully reserve all inventory that we do not expect to be sold in a
reasonable period of time from the balance sheet date, generally within the
ensuing twelve months. As a result of a reductions in estimated demand for our
products, we have provided additional reserves for excess quantities and
obsolescence for certain products, primarily our Flash and EEPROM products. In
fiscal 1998, the rapid erosion of selling prices also left us 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. We may suffer similar reductions in values of our
inventories in the future and we may be unable to liquidate our inventory at
acceptable prices.
WE MAY NOT BE ABLE TO SUSTAIN MARKET ACCEPTANCE FOR OUR FLASH MEMORY PRODUCTS.
A significant amount of our net revenues during fiscal 2001, 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. Our
operating results in fiscal 1999 and 1998 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
17
are utilized in more recently developed products such as digital cameras. Due to
intense competition, limited development resources and other factors, we have
decided not to develop any of the higher density Flash memory devices at this
time. We may not be able to sustain the market acceptance for our Flash memory
products. We anticipate continued price and other competitive pressures, which
adversely affected fiscal 1998 and 1999 operating results, to adversely affect
our future operating results.
WE RELY ON OUTSIDE PROVIDERS OF ENGINEERING SERVICES AND THE LOSS OF THESE
SERVICES MAY CAUSE A SIGNIFICANT INTERRUPTION IN OUR SUPPLY OF ENGINEERING
RESOURCES.
To supplement our limited engineering staff dedicated to product research
and development activities, we utilize the services of various outside
semiconductor design services. The most significant is an arrangement since 1995
to obtain engineering services from Lxi Corporation (Lxi) of which our officers
Messrs. Vanco, Voicu 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 us varies by quarter. As of October 31, 2001, Essex employed the
equivalent of approximately 11 full-time engineers to perform services relating
to key development projects including development, design, layout and test
program development services. Lxi may not continue to supply a sufficient number
of engineers to fulfill our requirements for outsourced engineering services and
we may not be able to procure engineering services from an additional source in
a timely manner. Our business, financial condition and results of operations
could be materially adversely affected by the loss of Lxi as a supplier of
outsourced engineering services and, to a lesser extent, the loss of our other
providers of outsourced engineering services, our inability to obtain a
comparable new supplier of such services, or any other circumstances causing a
significant interruption in our supply of engineering resources.
WE RELY ON THIRD-PARTY SUBCONTRACTORS TO SORT, ASSEMBLE, TEST AND SHIP OUR
PRODUCTS TO CUSTOMERS.
We outsource portions of our planning, finish work and test functions for
certain products, as well as our inventory management (shipping and receiving)
function to subcontractors who are primarily located in Thailand and The
Philippines. This reliance on third parties subjects us to risks such as reduced
control over delivery schedules and quality, a potential lack of adequate
capacity during periods when demand is high and potential increases in product
costs due to factors outside our control such as capacity shortages. Such risks
could lead to delays in product deliveries, lost sales and increased costs which
could harm our customer relationships and result in lower profitability.
INTERNATIONAL SALES COMPRISE A SIGNIFICANT PORTION OF OUR PRODUCT SALES, WHICH
EXPOSES US TO FOREIGN POLITICAL AND ECONOMIC RISKS.
For the six months ended October 31, 2001, international sales comprised
66% of our product sales. Additionally, for fiscal 2001, 2000 and 1999,
international sales accounted for approximately 60%, 61% and 45%, respectively,
of our product sales. The lower percentage in international sales in 1999 was
primarily attributable to the transition in Japan from Marubun Corporation, our
former distributor which resigned in fiscal 1998, to various smaller alternative
distributors that serve similar markets and our inability to compete with the
low selling prices in certain Far East markets. In fiscal 2000, we were able to
reenter certain Far East markets, contributing to the increased international
sales. We expect that international sales will continue to represent a
significant portion of our product sales in the future. However, our
international operations may be adversely affected by the following factors:
- 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.
18
All sales are invoiced and paid in dollars, reducing our 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 our purchases are in US
dollars, minimizing any direct currency fluctuation risk. In addition, our
business is subject to other risks generally associated with doing business with
foreign subcontractors including, but not limited to foreign government
regulations and political and financial unrest which may cause disruptions or
delays in shipments to our customers or access to our inventories. Our business,
financial condition and results of operations may be materially adversely
affected by these or other factors related to our international operations.
A RELATIVELY SMALL NUMBER OF CUSTOMERS HAVE ACCOUNTED FOR A SIGNIFICANT PORTION
OF OUR NET REVENUE IN THE PAST AND THE LOSS OF ONE OR MORE OF OUR CURRENT
CUSTOMERS, ADDITIONAL VOLUME PRICING ARRANGEMENTS OR AN EARLY TERMINATION OR
DELAY IN SHIPMENTS CAN AFFECT OUR RESULTS ADVERSELY.
A relatively small number of customers have accounted for a significant
portion of our net revenue in the past. For the six months ended October 31,
2001, no single customer represented more than ten percent of our revenues. For
the fiscal year ended April 30, 2001, shipments to Future Electronics, Inc., a
world wide distributor, represented 14% of our 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 10% of our revenues (13%, 12% and 11%
respectively). During fiscal 1999, no customer represented more than 10% of our
product revenue.
In addition, we have 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 and difficult to replace that revenue source
in the short-term upon cancellation.
Our business, operating results and financial condition could be materially
adversely affected by the loss of one or more of our current customers,
additional volume pricing arrangements, an early termination or delay in
shipments by one of our major customers.
WE HAVE BEEN UNABLE TO FULFILL ALL OUR CUSTOMERS' ORDERS ACCORDING TO THE
SCHEDULE ORIGINALLY REQUESTED DUE TO THE CONSTRAINTS IN OUR WAFER SUPPLY.
Due to the constraints in our wafer supply, from time to time we have been
unable to fulfill all our customers' orders according to the schedule originally
requested. Although we are striving to increase our supply of wafers and
communicate to our customers the scheduled delivery dates that we believe that
we can reasonably expect to meet, our customers may not accept the alternative
delivery date or may seek to cancel their outstanding orders. Our 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 us and our competitors, fluctuations in
customer demand for our 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 us in recent
fiscal years).
WE RELY UPON OUR INTELLECTUAL PROPERTY AND PROPRIETARY TECHNOLOGY AND MAY
RECEIVE NOTICES FROM TIME TO TIME THAT ALLEGE WE HAVE INFRINGED THE INTELLECTUAL
PROPERTY RIGHTS OF OTHERS.
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. For example, we were
served with a Complaint alleging that we are infringing the intellectual
property rights of Xicor, Inc., a maker of nonvolatile memory products. We have
answered the Complaint denying the allegations. We may receive other notices
and/or become a party to proceedings alleging our infringement of intellectual
property rights in the future. Such claims, if successful, could require us to
pay royalties on previous sales of the products which are alleged to infringe.
Additionally, in such event, we may not be able to obtain any required licenses
of third party intellectual property rights or be able to obtain such licenses
on commercially reasonable terms. Failure to obtain such a license in any event
could require us
19
to cease production of our products until we develop a non-infringing design or
process. Our business, financial condition and results of operations could be
materially adversely affected by the cost of litigation of any such claim or
resulting damage award. Please see Note 6 - "Contingencies" contained in Item 1
of this Report on Form 10-Q and "Item 3. Legal Proceedings" in our Report on
Form 10-K for the fiscal year ended April 30, 2001 as filed with the SEC on July
26, 2001 for additional information.
OUR SECURITIES ARE TRADED IN A LIMITED MARKET.
Our 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. Our stock was traded on the Over-The-Counter Bulletin Board market
until September 6, 2000 when we were re-listed on the NASDAQ SmallCap Market.
The over-the-counter market was generally less visible to investors and
therefore we were unable to meet the liquidity requirements of some major
commercial, institutional and private investors thus limiting the market for our
securities. We submitted a request on October 16, 2000 that our securities be
listed on the National Market, but due to general market and other conditions,
our stock closed below the $5.00 price per share which is required to qualify
for National Market listing and NASDAQ closed the listing application. We intend
to reapply for NASDAQ National Market listing if and when our shares trade for
an extended period above the $5.00 level, but we are 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 our part to adequately demonstrate
and verify our qualifications.
OUR BACKLOG MAY NOT RESULT IN FUTURE REVENUE, WHICH MAY ADVERSELY AFFECT OUR
BUSINESS.
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.
OUR ABILITY TO OPERATE SUCCESSFULLY DEPENDS UPON THE CONTINUED SERVICE OF
CERTAIN KEY EMPLOYEES AND THE CONTINUED ABILITY TO ATTRACT AND RETAIN ADDITIONAL
HIGHLY QUALIFIED PERSONNEL.
Our 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 we may not be able to retain such personnel or attract other
highly qualified personnel. Our business, financial condition and results of
operations could be materially adversely affected by the loss of or failure to
attract and retain any such highly qualified personnel.
WE DEPEND ON MANUFACTURERS' REPRESENTATIVES AND DISTRIBUTORS TO DISTRIBUTE OUR
PRODUCTS.
We market and distribute our products primarily through manufacturers'
representatives and independent distributors. Our distributors typically offer
competing products. The distribution channels have been characterized by rapid
change, including consolidations and financial difficulties. Our operating
results could be materially adversely affected by the loss of one or more
manufacturers' representatives or distributors, or the decision by one or more
distributors to reduce the number of our products offered by such distributors
or to carry the product lines of our competitors.
OUR OPERATIONS COULD BE HARMED BY 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. Our
operations could be harmed in the event of a major earthquake or other natural
disaster near our headquarters.
WE MAY NOT CARRY ADEQUATE INSURANCE COVERAGE TO PROTECT OUR BUSINESS FROM
CERTAIN TYPES OF LOSS.
20
Although we carry general comprehensive liability insurance and other types
of insurance coverages typical for most publicly-traded companies, the insurance
coverage we retain may not cover the specific damages that we incur. For
example, we do not carry earthquake insurance coverage and our commercial
coverage does not include protection for lost profits. Consequently, our
business may not be protected if we incur losses of a type for which we do not
retain coverage. Additionally, disputes with our carriers regarding policy
coverages might occur which could mean that we are unable to recover all of our
damages in the event of a loss. Such occurrences could negatively affect our
business, financial condition and results of operations.
A CHANGE OF CONTROL MAY BE DELAYED BY RESISTIVE MEASURES ADOPTED BY US.
Our 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 our stock, our Board's ability to issue "blank check" Preferred
Stock without stockholder approval and our staggered terms for our directors,
could have the effect of delaying or preventing a change in control of us.
WE MAY NOT BE ABLE TO EXPAND OUR PROPRIETARY TECHNOLOGY IF WE DO NOT CONSUMMATE
POTENTIAL ACQUISITIONS OR INVESTMENTS OR SUCCESSFULLY INTEGRATE THEM WITH OUR
BUSINESS.
To expand our proprietary technologies, we may acquire or make investments
in complementary businesses, technologies or products if appropriate
opportunities arise. We may be unable to identify suitable acquisition or
investment candidates at reasonable prices or on reasonable terms, or consummate
future acquisition or investment candidates at reasonable prices or on
reasonable terms, or consummate future acquisitions or investments, each of
which could slow our growth strategy. We may have difficulty integrating the
acquired products, personnel or technologies of any acquisition we might make.
These difficulties could disrupt our ongoing business, distract our management
and employees and increase our expenses.
WE RELY ON A CONTINUOUS POWER SUPPLY TO CONDUCT OUR OPERATIONS, AND THE CURRENT
ENERGY CRISIS COULD DISRUPT OUR OPERATIONS AND INCREASE OUR EXPENSES.
California has recently experienced an energy crisis that could disrupt our
operations and increase our expenses. In the event of an acute power shortage,
that is, when power reserves for the State of California fall below 1.5%,
California has on some occasions implemented, and may in the future continue to
implement, rolling blackouts throughout the state, with or without advance
notice. If blackouts interrupt our power supply, we may be temporarily unable to
operate. Any such interruption in our ability to continue operations could delay
the development of our products. Future interruptions could damage our
reputation, harm our ability to promote our products and could result in lost
revenue, any of which could substantially harm our business and results of
operations. In addition, we do not carry sufficient business interruption
insurance to compensate us for losses that may occur and any losses or damages
incurred by us could have a material adverse effect on our business, financial
condition and results of operations.
Furthermore, the deregulation of the energy industry instituted in 1996 by
the California government and shortages in wholesale electricity supplies have
caused power prices to increase dramatically, and these prices will likely
continue to increase or the foreseeable future. If wholesale prices continue to
increase, our operating expenses will likely increase, as our headquarters and
most of our employees are based in California.
RECENTLY ISSUED ACCOUNTING STANDARDS.
In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other
Intangible Assets". SFAS No. 141 requires that business combinations initiated
after June 30, 2001 be accounted for under the purchase method of accounting.
The use of the pooling-of-interest method of accounting is no longer allowed.
SFAS No. 142 requires that goodwill and other intangible assets will no longer
be amortized but shall be reviewed and tested annually for impairment. SFAS No.
142 will be effective for fiscal years beginning after December 15, 2001, and
early adoption is permitted for companies with a fiscal beginning after March
15, 2001. We expect that the adoption of SFAS Nos. 141 and 142 on May 1, 2002
will not have a material effect on our financial statements.
21
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment of Long-Lived Assets" which is effective January 1, 2002. SFAS No.
144 supersedes FASB Statement No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and the
accounting and reporting provisions relating to the disposal of a segment of a
business of Accounting Principles Board Opinion No. 30. SFAS No. 144 retains
many of the fundamental provisions of SFAS No. 121 and expands the scope of
discontinued operations to include more disposal transaction. We expect that the
adoptions of SFAS No. 144 will not have a material effect on our financial
statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk. We do not use derivative financial instruments in our
investment portfolio. Our investment portfolio is generally comprised of cash
deposits. Our policy is to place these investments in instruments that meet high
credit quality standards. These securities are subject to interest rate risk,
and could decline in value if interest rates fluctuate. Due to the short
duration and conservative nature of our investment portfolio, we do not expect
any material loss with respect to our investment portfolio.
Foreign Currency Exchange Rate Risk. The majority of our sales, cost of
manufacturing and marketing are transacted in US dollars. Accordingly, our
results of operations are not subject to foreign exchange rate fluctuations.
Gains and losses from such fluctuations have not been incurred by us to date.
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PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS:
4.4 Amendment to Rights Agreement among Catalyst Semiconductor, Inc.,
Bank Boston N.A. and EquiServe Trust Company, N.A. dated as of
September 27, 2001.
(b) REPORTS ON FORM 8-K:
No reports on Form 8-K were filed by Catalyst during the three months ended
October 31, 2001.
23
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: December 12, 2001 By: /s/ Radu M. Vanco
------------------------------------
Radu M. Vanco
Chairman of the Board of Directors,
President and Chief Executive Officer
Date: December 12, 2001 By: /s/ Thomas E. Gay III
-------------------------------------
Thomas E. Gay III
Vice President of Finance and
Administration and
Chief Financial Officer
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
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4.4 Amendment to Rights Agreement